Sheer regulatory stupidity and statism caused the financial crisis. But that shall not be admitted!

Sir, Lord Adair Turner writes: “The financial crisis began because of dangerous features within the financial system itself. Massively leveraged investment banks engaged in socially useless trading of huge volumes of complex credit securities and derivatives… The excessive risk-taking was allowed by bad regulation justified by flawed economic theory.” “Banks are safer but debt remains a danger” September 12.

Turner, like all other involved, does just not tell it like it is! 

The “massively leveraged investments of banks” were caused, 100%, by the simple fact that regulators allowed for these.

The “socially useless” in complex securities were mortgages awarded to poorer house buyers in the US, the subprime sector. 

The “excessive risk-taking” was in fact an excessive risk aversion that led to the excessive build up of bank exposures to what was considered, decreed, or concocted as safe. 

Yes Turner mentions “bad regulation justified by flawed economic theory”, but there was none of that, there was only sheer stupidity. Like when regulators allow banks to leverage 62.5 times only because a human fallible credit rating agency has assigned it an AAA to AA rating.

And Sir, assigning a 0% risk weights to the sovereign, like to Greece is not based one iota on economic theory but all on flawed statist ideology.

Turner is right though when he writes that the “economic growth has been anaemic despite massive policy stimulus… “That poor performance reflects… inadequate capital regulation.”

Indeed, the distortions that the risk weighted capital requirements produced in the allocation of bank credit to the real economy that have not even been admitted much less were eliminated. “Debt burdens shifting around the world economy from private to public sectors” are just one symptom of those distortions. 

In fact by having raised the floor of bank capital requirements with leverage ratios, on the margins, the roof, the distortions of credit risk weighted capital requirements could be worse than ever.

Turner consoles us with “A deep economic recession, made worse by a large debt overhang, could occur even if not a single big bank went bankrupt or needed to be rescued with public money.”

Not true a deep economic recession, a dysfunctional economy is as dangerous as can be for the banks and for us. That is why the most important question that regulators need to answer before regulating banks is: what is the purpose of banks. Except for being safe mattresses to stack away cash there is not on word on this in the whole immense Basel Committee compendium on rules.

“The increasing role of real estate in modern economies is also crucial.” That is because, by means of giving house purchase access to credit on preferential conditions, a house is no longer just a home it has also become an investment asset. The day houses return to being home only it is going to hurt, a lot. 

“Rising inequality”… with capital requirements that favor the “safer” present over the riskier future, how could that be avoided?

PS. And Sir, you know it, FT has in many ways been complicit in the cover up of our mistakes stories peddled by regulators and their colleagues.

@PerKurowski

When banks can leverage more their equity financing “safe” built houses than financing “risky” job creation, too many young are doomed to live unemployed in our basements

Sir, Bill Mendenhall in a letter of December 18, “Lord Turner got there first on productive credit” mentions a report by Jim Pickard “Labour looks at making mortgage lending harder for banks” December 12. Pickard’s report was not in FT’s US edition.

Pickard wrote: “Shadow chancellor John McDonnell is considering making mortgage lending more onerous for banks in an effort to push them to lend more to smaller companies…The proposals were set out in “Financing Investment”, a report commissioned by the Labour leadership and written by GFC Economics.

According to GFC, British banks are “diverting resources” away from vital industries and instead focusing on unproductive lending, such as consumer credit borrowing.

The paper argues that the Prudential Regulation Authority, the BoE’s City regulator, should use existing powers to make banks hold relatively more capital against their mortgage lending. The report’s authors say this would be an “incentive to boost SME lending growth”.

The GFC report also claims that the BoE’s Financial Policy Committee “makes no distinction between unproductive and productive lending” to companies, arguing that the banking sector “should be geared towards stimulating productive investment”.

The report calls for the FPC to use existing powers to vary the risk weights on banks’ exposures to residential property, commercial property and other segments of the economy.

The report acknowledges that such interventions would be seen by critics as risky measures that could “impede the smooth functioning of markets” and distort the efficient allocation of capital. But it warns that “financial stability risks will emerge if an economy loses its competitiveness”.

Sir, you must be aware that this includes much of what I have written to you in thousands of letters, for more than a decades, and that you have decided to ignore.

But, if that report acknowledges that “to vary the risk weights on banks’ exposures to residential property, commercial property and other segments of the economy… would be seen by critics as risky measures that could ‘impede the smooth functioning of markets’’, why does it not then question the distortion the current existing differences in risk weights cause?

Pickard also mentions that the report warn that “financial stability risks will emerge if an economy loses its competitiveness”. No doubt! Banks cannot be the sole triumphant survivors in an economy that is losing strength.

And when now Mendenhall writes that “Lord Turner got there first on productive credit” because in his 2015 book Between Debt and the Devil he pointed out that “the banking sector’s decades-long switch away from lending to businesses towards mortgage lending only serves to inflate asset prices, which leads to property bubbles”, that does not mean that Lord Turner really understood or understands what has happened.

In June 2010, during a conference at the Brooking Institute in Washington DC, I asked Lord Turner “Do you really think the banks will perform better their societal capital allocation role if regulators allow them to have much lower capital requirements when lending to the consolidated sectors than when lending to the developing?

To that Lord Turner (partially) responded: "we try to develop risk weights which are truly related to the underlying risks. And the fact is that on the whole lending to small and medium enterprises does show up as having both a higher expected loss but also a greater variance of loss. And, of course, capital is there to absorb unexpected loss or either variance of loss rather than the expected loss.”

Pure BS! With that Lord Turner evidences he ignores that banks already clear for the higher risks when lending, so that when also clearing for it in the capital, the whole credit allocation process gets distorted… and banks end up lending more to build “safe” downstairs for our children to live in with their parents, and lending less to “risky” entrepreneurs who could get them the jobs to afford buying their own “upstairs” 

No, Lord Turner is just one of those too many regulators that want banks to hold the most capital against what is perceived as risky, while in fact it is when something perceived as safe turns out to be risky, that we would most like that to be the case.

@PerKurowski

Lord Turner, peer to peer lending P2P, stands no chance of satisfying the needs banks were instructed not to fulfill

Sir, Ruth Gillbe reports in FT’s Adviser that Lord Adair Turner now opines "peer-to-peer lenders … might be able to do credit underwriting as well as established banks”. “Lord Turner u-turns on P2P mis-selling” October 12.

No, let us hope they can do it much better, and for that a prerequisite is for the scheming and hubris filled bank regulation technocrats, to stay out of their way.

Let us be clear, the P2P lending is taking off, somewhat, much because regulators, such like former chairman of the Financial Services Authority Lord Turner, with their risk weighted capital requirements, gave banks incentives to go only to where it was perceived, decreed or concocted as “safe”, and stay away from what was perceived as “risky”

Sir let us hope (pray) these regulators wake up and stop distorting the allocation of bank credit; since just with P2Ps it will not be enough to get our economies going again.

Chances of that are slim though. Can you imagine a Lord Adair Turner bowing humbly and asking for forgiveness, like a failed Japanese executive could do? 

@PerKurowski ©

The real unusual economic ill we suffer, is that of regulators ordering our banks to be risk adverse.

Sir, Martin Wolf argues for “Radical cures for unusual economic ills” November 26.

And therein he identifies the illness as the “chronic demand deficiency syndrome”, meaning “the private sector has failed to spend enough to bring output close to its potential without inducements of ultra-aggressive monetary policies, large fiscal deficits, or both.

But “to bring output close to its potential”, is sort of a half-baked aspiration for an economy, as it always need to strive to expand its potential.

And usually that signifies also to expand the economy’s potential more than what other economies can expand theirs… unless of course you subscribe to a somewhat Piketty like thesis that we must stop doing so in order for other to have a chance to catch up.

And, expanding the potential of an economy, can only be the result of risk-taking; never of that risk aversion which has been introduced by bank regulators, by means of their portfolio invariant credit risk based capital (meaning equity) requirements for banks.

But, unfortunately, just like the geocentric experts of the past could not get their hands on the realities of a heliocentric world, Martin Wolf belongs to those who confuse the world of ex-ante perceived risks, with the world of ex-post realized dangers; and therefore cannot understand that real banking risks do not revolve around what is perceived “risky”, but always around what is perceived as “absolutely safe”.

Wolf, referring to Lord Turner’s recommendation of “nationalizing the creation of money now delegated to often irresponsible private banks”, considers that as a “probably more effective way… to create money in order to expand demand”.

What a laugh! The truly real irresponsible have been the bank regulators like Lord Turner who, with such immense hubris, thought themselves capable of being the good risk managers for the world.

And now Martin Wolf, seemingly getting a bit desperate also argues that “Unproductive savings should be discouraged” and so “tax savings instead”. So let me end here by just asking: who is going to decide what is unproductive saving and what is not… is it Martin Wolf and his bank regulating buddies? I pray, for the sake of my grandchildren, for that not to happen.

PS. Why is Lord Turner lately so often referred to only as Adair Turner? Is he ashamed of his title? If so, relieve him, and take it away.

Lord Turner, if a helicopter is to drop money, then drop it on the citizens, who are those who will have to pay for it.

Sir, not only does Bank of England buy huge amounts of government bonds; and banks do not need to hold any equity against these bonds, so they are also big buyers; and new bank liquidity requirements will also favor them holding sovereign instruments.

But now Lord Turner, to top it up, also wants to make a Friedman helicopter drop of money, on the government, on its bureaucrats, to finance a special one shot deficit, “Print money to fund the deficit – that is the fastest way to raise rates” November 11. He really must adore government!

By the way this is not the first time Lord Turner speaks about this drop.

I have no problem with the concept of a helicopter drop (I have a gold hedge) but, if something goes terribly wrong, and run inflation results, it will be the poor who suffer the most. And so I would suggest dropping that money directly on the British citizens.

Lord Turner explains the “current mess” in terms of “excessive private sector credit growth”. Indeed, but let us not forget that, as a bank regulators, by allowing the outright stupid credit-risk-weighted capital/equity requirements for banks, was himself much guilty of that. 

That regulation caused banks to leverage their equity to the skies; completely distorted the allocation of bank credit in the real economy, and, by favoring “the infallible” and discriminating against “the risky” is also a driver of growing inequality. 

And we are to trust them?

PS. If we know that inflation is primarily a tax on the poor, then why is deflation so bad for the poor?

We need much less incestuous processes for determining bank regulations

Sir with respect to bank regulation, you write: “As the crisis showed we should be humble about the limits of our knowledge. Excessive faith was invested in abstract mathematical models, while insufficient effort was made to link these to real-life experience…The recital of laws and ritual genuflection towards mathematical models may lend the subject a certain intellectual respectability but much of this is spurious. Substituting a little humility for pretention would be a welcome step”, “The new economics”, November 13.

Indeed, but what it mostly describes is the absolute necessity of stopping members of a mutual admiration club, who do not dare to criticize colleagues, or are to spineless to confess they do not understand one iota, from engaging in incestuous thinking processes, and then having the right to impose not duly vetted regulations on the whole world. I say this because the mistake that caused the crisis and stops us from getting out of it, is of a much deeper nature than trusting too much abstract mathematical models.

Here I go again: Banks and markets clear for ex ante perceived risks of default by means interest rates, size of exposure and other terms, like duration. Therefore to clear for the same perceived risks, like regulators do with risk weighted capital requirements, more risk more capital less risk less capital, is more than wrong, it is dumb.

First it upsets the whole risk-price equation and distorts all common sense out of the process by which banks allocate credit in the real economy. Banks make much higher risk adjusted returns on equity when financing “The Infallible” than when financing “The Risky”… and so banks stop to finance the future and mostly refinance the past.

And second, it is all for nothing since never ever have bank crisis resulted from excessive exposures to what was ex perceived as safe, these have always resulted from excessive exposures to what was perceived as absolutely safe.

We are now 5 years into the crisis and the distortion that risk weighted capital requirements for banks produce in the allocation of credit in the real economy… is yet not even recognized as an unforeseen consequence, much less is it on the agenda. And that by itself Sir, is an extremely serious problem.

By the way, the fact that you in FT decided to ignore the hundreds of letters I have written to you over years spelling out the mistake; and that you now champion The Institute for Economic Thinking, where failed regulator Lord Turner is now a Senior Fellow, as "charged with the task of restoring academic economics to its standing", only indicates that you might be a member of the same club and therefore also part of the problem.

Tim Harford, be very careful, regulators might wish to regulate baking more

Sir, Tim Harford ends his splendid “Why can´t banking be made more like baking” November 2, with, “I wonder if even Mr Carney will be able to make the market for pensions work like the market for croissants”.

Harford should be much more careful, because other regulators might be lurking in the shadows with desires to regulate baking. For instance they could come up with a tax on low fiber content in bread, in order to help the British people digest better, which would result in, sooner or later, in the British people only being offered fiber.

I say this because bank regulators, like Lord Turner, and like Mark Carney, the current chairman of the Financial Stability Board, considered that the only socially “useful” activity that a bank could engage in was to make certain it would not default. And, to that effect they concocted capital requirements for banks based on perceived risks.

And that regulation allows banks to earn much much higher risk adjusted returns on equity when lending to “The Infallible”, sovereigns, housing and the AAAristocracy, than when lending to “The Risky”, medium and small businesses, entrepreneurs and start-ups. And in this case we all see how, instead, all the fiber is being taken out of UK´s real economy.

Why should banks earn higher risk adjusted returns on equity financing property than when financing businesses?

Sir, John Plender writes “Historically, the biggest single cause of financial crises in the UK has been the bursting of property bubbles” “BoE lacks tools needed to prick property bubble” September 25.

If that is so, which I have no reason to suspect it is not then would he, or Lord Turner, explain to us, why were regulators allowing banks to lend to property against less capital than when doing much other lending? Did that not signify that banks would be earning higher risk adjusted returns on equity on property lending than on other lending? Did that not doom banks, next time a property bubble burst, that everything would be so much worse, since banks would be standing there with especially little capital?

BoE does not lack tools. It just needs to arm itself with a new generation of regulators capable of understanding that risk-taking is not something dirty, even when banks do it. And of understanding that there is nothing as risky as excessive risk-aversion.

Lord Turner, put on a dunce cap, and go and sit in a corner

Sir, Gillian Tett quotes Lord Turner in that a standard economics text book claims that banks exist to “raise deposits from savers and then make loans to borrowers”… and “primarily lend to firms/entrepreneurs to fund investment projects” but that it is a fiction, as he calculates that today in UK a mere 15 percent of total financial flows actually go into investment projects, the rest is to support existing corporate assets, real estate or to “facilitate lifecycle consumption smoothing”, “Debt explosion is the real story behind QE dance”, September 20.

Frankly, what did this former bank regulator would happen when he and his colleagues never concerned themselves one iota with what the purpose of the banks could be; and limited their action to mostly allowing extremely low capital requirements for banks on whatever exposures that, ex ante, could be perceived as “absolutely safe”; something which of course made it so much more difficult for “The Risky”, the medium and small businesses, the entrepreneurs and the start-ups to access bank credit, in competitive terms?

The regulators helped to hook western economies on ever-expanding levels of debt? Yes, indeed, but worse yet, they castrated the banks and introduced a regulatory risk-aversion that is taking the western economies down down down.

As I see it Lord Turner is just one of those regulators who should put on a dunce cap, and go sit in a corner. Is it rude of me? Perhaps but what, except for socially sanctioning such dumb behavior, can an ordinary citizen do?

And, of course, this also goes for many other of Lord Turner's regulating colleagues. Like Mario Draghi and Stefan Ingves for example. A Big "Dunce-Cap" Party!

Happy birthday Financial Times. On this your 125th year could you please explain your motto to us?

Sir, there is little so dumb, so indefensible and so damaging to the economy, as capital requirements for banks which are much lower for whatever is perceived ex ante as “absolutely safe” than for what is perceived as “risky”

That ignores completely that the origin of all major bank crises lies entirely among those deemed “The Infallible” but which ex-post turn up to be quite fallible, and never ever among those who were ex ante correctly deemed to be “The Risky”.

And, by favoring what is already favored by the banks and markets, and discriminating against what is already discriminated against by banks and markets, that introduces distortions that makes it completely impossible for banks to perform their vital social function of an efficient economic resource allocation.

Just as an example those loony regulations, Basel II, required banks to hold 8 percent in capital, a leverage of 12.5 to 1 when lending to “The risky”, like small businesses or entrepreneurs, while allowing banks to hold only 1.6 percent in capital, a leverage of 62.5 to 1, when lending to a sovereign like Greece or investing in a security rated AAA to AA.

And among those regulators we find names like Lord Turner and Mario Draghi, names upon which heaps of praises have been poured on by FT over the years, names who have not been criticized by FT one iota for their regulatory stupidity.

That is why, in this the 125th year of FT, I would like to know when you adopted the motto of “Without favor and withour fear” and what that motto signifies.

I ask this, because I do agree with Nigel Lawson in that in this world “the FT has a unique role to play as a fount of reliable information and informed comment”, “No print rations, no clubby City – but the FT’s role endures” February 13.

And I ask this because your refusal to spell out these arguments allows the regulators to dig us even deeper into the hole when they, in Basel III, also want to introduce liquidity requirements based on the same ex ante perceived risks.

Happy birthday!

No Mr. Martin Wolf, our banks are not terminally ill, and we don’t have to go communist

Sir, imagine being a director in an old fashioned bank board which approves all credits, one at the time. And then think about how you and your colleagues would proceed if, in a corner of the board room sat a regulator who ordered you to allocate a certain amount of capital for each credit, depending on the risk of the borrower, as perceived by a credit rating agency. It would of course be impossible for you to allocate the bank credits in such a way that maximizes economic growth. But that is in essence what happens today, and so we have a banking system that has become completely dysfunctional.

But this regulatory intrusion in the credit allocation system of the banks, and which among other allows banks to create money when lending to “The Infallible” against almost nothing of their own capital, and which de-facto penalizes the lending to “The Risky”, is still much ignored, perhaps even on purpose.

For instance when Martin Wolf asks: “Why should state-created currency be predominantly employed to back the money created by banks as a byproduct of often irresponsible lending?”; and follows up with a “the case for using the state´s power to create credit and money in support of public spending is strong”; he is arguing his point based on the premise that our banking system is irreversibly damaged. And based on that he suggests we should leap into a system where government bureaucrats substitute for private decision making, and “discussions between the ministry of finance and the independent central bank substitutes for markets, “The case for helicopter money…” February 13.

Yes Mr. Wolf “Cancer sufferers have to undergo dangerous treatments”, but these have to be the correct treatments. And the most correct treatment of our banking system is to help our banks to get rid of those obnoxious regulatory intruders (like Lord Turner) who so stupidly, and odiously, favor those already favored and discriminate those already being discriminated against by the markets.

Many years ago, I set up a blog titled the AAA-bomb, and where in jest I described how a disgruntled unemployed former Kremlin bureaucrat sat out to destroy the “enemy” by planting the idea of capital requirements based on perceived risk in the middle of its banking system.

But when Martin Wolf writes about fiat money promoting public spending in terms of morality, and ignores the fact that the banks’ boardroom intruders already allow banks to lend to the infallible sovereign without holding any capital, I get that uncomfortable sinking feeling that perhaps there is more of a conspiracy to it than what I ever thought possible.

Does this mean I am an extremist set against any government stimulus or deficit? Of course not! But I do believe we must see to that our economic resources are efficiently allocated by the banks, before we waste whatever fiscal and monetary space we might have available. 

PS. Wolf begins by quoting Mark Twain saying “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”. That is something that clearly describes the sheer stupidity of capital requirements for banks based on trusting too much ex-ante perceptions of risk to hold up ex-post.

PS. Lord Adair Turner in the “Debt, Money and Mephistopheles” lecture referenced, speaks about “pre-crisis financial folly – above all the growth of excessive leverage”. But there is not one word about his shameful role, as a regulator, in creating the crisis. Not a word about that he thought it was ok for a UK bank to hold 8 percent in capital, a leverage of 12.5 to 1 when lending to a “risky” UK small businesses or entrepreneur, while allowing banks to hold only 1.6 percent in capital, a leverage of 62.5 to 1, when lending to a sovereign like Greece or investing in a security rated AAA to AA.

But, if dropping money on the real economy, don’t let Lord Turner or any of his regulatory colleagues pilot the helicopter

Sir I refer to your “Helicopter lessons” February 6, where you analyze some favorable comments made by Adair Turner on “helicopter money”, meaning “putting newly minted cash irreversibly into the economy". In it you write giving “cash to the private sector rather than to the public treasury [has] the advantage it keeps intact market discipline on budgetary choices”.

You are absolutely right. But in the same vein let me also remind you that if you drop money on the economy by helicopter, make really sure this one is not piloted by Lord Turner, or any other of his bank regulating chums. I say this because these are those who have seen it as their mission in life to make certain that banks only lend to “The Infallible” and not to “The Risky”

And when doing so, they seem to never care about the fact that bank exposures to “The Risky” have never been large enough to create a major bank crisis, only excessive exposure to “The Infallible” do that; and neither do they want to listen to that “The Risky” include many who make a living on the margins of the real economy, and who extremely important for making it moving forward, so that this one does not stall and fall, and bring all of us down, including the banks.

The regulatory distortion produced by these runaway regulators, is directly responsible for that our banks can no longer perform an efficient allocation of economic resources.

If you want to see really big time meddling you need not to go to Italian industry.

Sir, Tony Barber makes some good points in “Meddling does Italian industry more harm to good” December 14. 

What a pity Barber cannot find it in himself to make the same point against the really big time meddling regulators who, with their capital requirements for banks based on perceived risk, create regulatory subsidies in favor of “The Infallible” and regulatory taxes against “The Risky”. 

I guess the bank regulators must belong to Barber’s intimate circle, not so the industrial policy bureaucrats. 

By the way, Mario Draghi, FT’s Person of the Year, as well as Ben Bernanke, Lord Turner and other active in regulations of banks, there you have some real big time meddlers, or schemers

As a central banker Mark Carney might be great, but, as a bank regulator, like the rest of that bunch, he stinks.

Sir, I do not opine on Mark Carney´s qualifications as a traditional central banker, these are probably fabulous, but, as a bank regulator, like Mario Draghi, Lord Turner, Michel Barnier, the Americans and the rest of the current bunch, he is not qualified.

Anyone who does not understand that lower capital requirements for banks on assets perceived as “The Infallible” than on assets perceived as “The Risky”, artificially elevates bank returns for the first and makes the other uninteresting, cannot be a good bank regulator… and this is simply so because a good bank regulator also thinks about the purpose of a bank, primarily that of allocating efficiently resources in the economy.

To me all current regulators are also non-transparent statists, since only statists could think of requiring a bank to have some capital when lending to “The Risky”, like the small businesses and entrepreneurs, while allowing the banks to get away with zero or very little capital when lending to “The Infallible”, like to “infallible” sovereigns, and to their courtiers, the triple-A rated.

Well, the result of all their badly concocted risk-adverse regulations, Basel I, II, and III, will be that we are all going to see our banks and our savings drown into oceans of absolutely worthless “absolutely safe assets”; and only then will the regulators perhaps remember that the actions of “The Risky” are in fact through history those that most have contributed to our economic well being.

That they´ve learned their lesson? Forget it! Basel III only doubles down on their mistake. Now on top of capital requirements based on perceived risk, we are also going to have liquidity requirements based on perceived risk; and the too big to fail their regulations helped to grow, have now been promoted into "Systemic Important Financial Institutions", leaving the rest of the banks in the unimportant segment.

I assure you that history will not be kind on these regulators (nor on their collaborators)

PS. This mostly references Brooke Masters´ and Claire Jones´ “Outspoken and innovative, Carney enjoyed a good crisis” November 28.

“You have to rely on audited financials” “You have to rely on credit rating agencies”. Same old dumb story! (excuse)

Sir, Chris Nuttal and Richard Waters, with respect to Hewlett Packard’s messed up acquisition of Autonomy, quote Meg Whitman, HP’s CEO saying, “But in the end, you have to rely on audited financials and we did.”, “Blame game thrusts tech group’s due diligence under the spotlight” November 22.

How wrong! The first responsibility of anyone in Whitman’s shoes should be… "Is there anyway something like this could be worth this much and, if so, let us ascertain those conditions are valid, no matter what anyone else opines."

Hers is precisely the same defensive argument put out by bank regulators with their “in their end you have to rely on credit rating agencies”.

The truth is that if we shareholders, citizens and taxpayers don’t put an end to this stupidity and lack of accountability, it will put an end to us.

The way I look at things bank regulators like Mario Draghi and Lord Turner, are just about the same as failed CEOs like Meg Whitman.

Pray for some shadows sufficiently dark for some banks to escape the regulators... Caveat emptor, regulators regulating!

Sir when reading Brooke Masters report on “Regulators to tackle shadow banking”, November 19, and given the regulators doing that are the same old failed regulators, I can only fret for the future of whatever they identify as “shadow banking”.

If the regulators keep acting according to their so mistaken paradigm of weighting anything for perceived risks, even if those risks have already been weighted for, then they are dooming the shadow banks, like the surface banks, to create dangerously excessive exposures to what becomes officially considered as “The Infallible”… just like those exposures created in AAA rated securities back with lousily awarded mortgages to the subprime sector, loans sovereigns like Greece, or real estate financing in Spain.

And in that case, let us pray there will still be some banks hidden away in sufficiently dark shadows so that “The Risky”, like our small businesses and entrepreneurs, can at least have some access to bank credit… even if on the unnecessary expensive terms that the regulators’ dumb and useless risk-aversion has created. 

Lord Turner magnanimously admits that “Shadow banking is like cholesterol. There is good and there is bad”, but says “now we’ve got the really difficult job of getting national authorities to dive in and determine [which part of shadow banking] really worries us.” And that should worry us… because that sounds just like when the regulators discovered the too-big-to-fail banks they helped create, they just proceeded to make it worse by naming these Systemic Important Financial Institutions, SIFIs, and thereby relegating the rest into being systemic unimportant financial institutions. 

When will the regulators understand how much they distort all, when just distorting some? Why do they not just loudly proclaim that caveat emptor rules the shadows? Or perhaps we must: “Caveat emptor, regulators regulating!”

Do not let Lord Turner, FSA, FSB, or any bank regulator set the flight plan for a helicopter drop.

Sir in “Helicopter money”, October 14, you refer to Adair Turner, Lord Turner, head of Financial Service Authority suggesting the “helicopter drops” of newly minted money something you define as the “nuclear option” of monetary policy. He should be ashamed. 

The only reason we very well might now need a general helicopter dropping of money, is because all huge moneys previously injected were dropped in the wrong spot. Lord Turner, FSA, and their regulatory colleagues made certain, by means of their sissy capital requirements for banks based on perceived risk that all new money got routed towards “The Infallible”, and none of it to “The Risky”, like to the small businesses and entrepreneurs who could have put it to so much better use. 

If there is to be a helicopter drop, please don’t let regulators set the flight plan, I trust any helicopter pilot to do that much better on his own. 

A “nuclear option”? Forget it! Here the real nuclear device used, was that AAA-bomb bank regulators exploded in the midst of our financial system.

PS. My 2019 letter to the Financial Stability Board 

You’ve got to be kidding. Did you really hope the economy could recover sturdily without banks taking risks on the “risky”?

Sir, FT’s Special Report, World Economy, October 12, subtitles “Hopes turn to fear and uncertainty”. 

But it was regulatory risk-adverseness that saddled our banks with excessive exposures to what was ex ante officially perceived as not risky, because that required much less capital than lending to the risky, which set off this crisis. In other words, there was an excessive regulatory fear of the “risky”. 

And so what “hopes” do you refer to? That we could get out of this monstrous economic imbroglio by continuing having fearful regulators telling the banks to avoid more than ever taking a chance on those perceived as “The risky” and concentrate all their lending on “The Infallibles”? While government simultaneously injected money in the economy as there was no end to it? You’ve got to be kidding! Did you really hope that would work? 

No. Hope means understanding the need for risks and being willing to take these. While your banks are governed by regulators with a sick attitude toward risk, we are simply doomed. 

That the “world economy was hamstrung by uncertainty, which was preventing companies from investing” as Olivier Blanchard of the IMF says, sounds like a cruel joke to me. Just consider how much bank regulators have hamstrung the banks from lending to the risky small businesses and entrepreneurs, by, in times of huge scarcity of bank equity, requiring the banks to hold much more equity when doing so, than when lending to infallible sovereigns. 

And FT has not been willing to call out the sissines of that! “Uncertainty”? Ha! As if economic growth could be turned into a riskless affair? Where did you, and the banks regulators you seemingly so much admire, get such a crazy idea?

Those with medical preconditions should fret, as Lord Turner and other bank regulators want to regulate insurers.

Sir, Brooke Masters and Alistair Gray report that “FSB committee turns its attention from banks to insurers” September 27, and they write that “the industry representatives present came away hopeful that their worst fears about the plans would be averted”. 

Yes, but perhaps those who really need to fret are the “risky” insurance risks, like those with medical pre-conditions, because if regulators, like Lord Turner, would apply the same principles when regulating insurers as they do when regulating banks, the insurance company would be required to hold more capital when insuring the “unhealthy-risky” than what they would need to hold when insuring the “healthy-not-risky”. 

And that would of course mean that those qualified as “healthy-not-risky” would see their premiums lowered and those perceived as “unhealthy-risky” would see their premiums go up, precisely like what happened with the interest rates charged by banks to those officially perceived as “not-risky” and “risky”.

A wicked question for the candidates for governor of Bank of England

Sir, as you write, finding a governor of all the talents required to run the Bank of England, is indeed an extraordinarily important and formidable task, September 14. 

But that is under normal circumstances. Currently though, given the difficulties with the banks, even more important and urgent than that, is to find a better regulatory paradigm. And for this purpose, I would begin by asking each candidate for governor, the following simple question: 

When do banks most need capital, when the risky turn out risky, or when the “not-risky” turn out risky?

And then follow it up with a “So?”