In the Fed, more than Trading Floor experiences, we need Main-Street experiences.

Sir, Mohamed El-Erian writes “Let’s not forget some market participants’ growing interest in modern monetary theory, including the view that persistently low yields enable higher central bank financing of government deficits. But such comfort risks being short-lived.” “Attacks by Trump risk damaging the Fed’s credibility”, April 12.

El-Erian leaves me a bit confused. Does he think the “modern monetary theory” could be any source of comfort even if short lived? I myself consider it a prime example of a dangerous fake theory, probably concocted by redistribution profiteers, and that because it offers such an “Easy Street” has simply gone viral. If we had any respect for Edmund Burke’s holy intergenerational bond, we should all do our utmost to destroy it.

Then El-Erian speaks of the need of the Fed to have a “‘feel’ for markets — that is… officials on the Federal Open Market Committee who have been properly and comprehensively exposed to operational responsibilities on trading floors.”

He is surely right that some of the members of FOMC should have that experience but, even more important than that is the experience from Main-Street, like when entrepreneurs want to access bank credit. 

Had there been just one single of those in the Fed, he would most surely have asked: “Colleagues, why do you set the risk weighted capital requirements higher for that which is perceived as risky, and which precisely therefore have such difficulties getting credit from the banks, and so therefore are quite innocous to our bank system?” 

Had that question been posed with enough firmness in requiring a clear answer, the 2008 crisis would not have happened and the world would definitely look better than now.

@PerKurowski

The Fed and bank regulators have done many times more harm to the real economy than the political leadership, President Trump included.

Sir, Rana Foroohar writes:“It is clear that the power of monetary policy to support the real economy has diminished. In lieu of better political leadership, the key task for central bankers in the years to come may be to roll up their sleeves and do the gritty work of bolstering not the markets, but Main Street.” “Central bankers refocus on Main Street” December 31.

That’s not likely to happen. The Fed and bank regulators have clearly evidenced they are not up to that task. Without the slightest consideration to how banks are to serve the real economy, and its needs for development, with their risk weighted capital requirements for banks, they blocked “the risky” Main Street’s access to bank credit, in order to favor all that which was perceived (or decreed) as safe… like residential mortgages (and the sovereign) 

Now every one of them will eagerly be trying to escape his or her responsibility, by blaming Donald Trump, who in many ways is acting as a perfect godsend scapegoat.

PS. “We are almost 10 years into a recovery cycle — the time when economic slowdowns typically occur”. That might be so, but it still sounds so expertly besserwisser. 

"Paga-peo" a Venezuelan name for a scapegoat

@PerKurowski

When the “filthy rich” buy assets, they might do it good or bad, but they are de facto voluntarily redistributing money.

Sir, Tim Harford writes “Researchers concerned about the concentration of money in the hands of a small number of people tend to focus on the income or wealth share of high earners”, “All things are not equal in measuring inequality” August 18.

Indeed, all things are not equal, the income or wealth shares of high earners, c'est pas la même chose.

The debates on inequality, promoted mostly by redistribution profiteers, conveniently ignore that the moment money, meaning Main-street purchasing power, is exchanged for an asset, it has effectively been redistributed, to the vendors of those assets.

So yes, governments can redistribute money, but that does not mean it can redistribute wealth as easy, and without possibly serious unexpected consequences.

Not long ago, someone really wealthy, by means of a sort of voluntary tax, froze US$ 450 million of his real purchasing power on a wall, by acquiring Leonardo da Vinci’s Salvator Mundi. How do you redistribute that painting? One way is to get another filthy rich to redistribute his money buying it, most probably for less. Another way might be cutting it in thousands of small-certified pieces and thereby allow many much less wealthy to buy these, and thereby perhaps redistribute much more than US$ 450 million. Should we proceed to hack up Salvator Mundi?

Sir, at the end of the day, the one question that always lingers is, who redistributes money the best? The usual answer “Me!” or “Us!”

@PerKurowski

How much of billionaires’ wealth might have de facto already been redistributed?

Sir, John Gapper writes interestingly, from the perspective of how these are designed, about “public art museums funded by billionaires”. He concludes in that, as so many follow the same principles; it is beginning to have similitudes to a franchise. “Billionaires are franchising the art museum” August 9.

Currently in the political market, way too often we hear offers phrased in the simplistic terms of: “Let’s take it from the filthy-rich and give it to the poor and, Puff! all odious inequality will have disappeared.”

In order to stop the creation of those false expectations, which at the end only leads to frustrations and the enrichment of the of the redistribution and/or polarization profiteers, by increasing the value of their franchises, there is a real societal need for much more information. 

Like, what wealth to be redistributed are we talking about? How much might billionaires have already de facto redistributed their Main-street purchasing capacity wealth, by demanding and buying assets that no one else but them would be demanding, at least not at those ridiculously high prices?

Not long ago, someone really wealthy, by means of a sort of voluntary tax, froze US$ 450 million of real purchasing power on a wall, by acquiring Leonardo da Vinci’s Salvator Mundi. Sir, I ask, how do you redistribute that painting without perhaps serious unexpected consequences? Cutting it in thousands of small-certified pieces, and selling these in the market for much more than US$ 450 million? 

@PerKurowski

What does “stored wealth” mean? Is it really redistributable, just like that, without any consequences?

Sir, Edward Luce writes: “America’s elites have stored more wealth than they can consume. This creates three problems for everyone else” “The discreet terror of the American bourgeoisie”. February 8.

What does “stored wealth” really mean? You do not hide your main-street purchase capacity in cash under a mattress; you hand it over to someone else in exchange for an asset or a service.

When some very wealthy recently bought Leonardo da Vinci’s “Salvator Mundi”, he froze, with a sort of voluntary tax, US$450 million on a wall or in a storage room. Those US$450 millions were received and used by some other wealthy or not that wealthy. Should that not have happened? Should he have used his money better? What if those who now have his money know how to put it to much better use?

The war against wealth is raging. Whenever wealth has been obtain by criminal, or by unjustified means, like monopolies or excessive intellectual property rights exploitation, that war makes sense. But, those who preach that all will be well and dandy, if only wealth is redistributed, like from the 1% to the 99%, never explain how one now converts a Salvator Mundi, into fresh main-street purchase power, and the consequences of doing so.

We could assume that much of that lack of explanation is because many of the wealth redistribution fighters are in fact redistribution profiteers interested in increasing the value of their franchise.

PS. Not long ago, visiting the Museum of Louvre, it dawned on me that most of what was exhibited there would not have come into being, were it not for the existence of the filthy rich. Can we really afford, do we really want, to live without them?

@PerKurowski

More than from corporate governance failures Britain, and the Western World, suffer a hubristic regulatory failure.

Sir, Martin Wolf, on the issue of: “why [UK] productivity growth is so pervasively low” writes: “One reason could be the exceptionally weak investment, by international standards. This would be another corporate governance failure. Rectifying this disaster is the UK’s most important policy challenge, far more so than Brexit. The government should finance a high-level effort aimed at working out what has gone wrong, why and what (if anything) to do about it. The country’s very future is at stake.” “Britain’s dismal productivity is its biggest policy challenge” April 7.

What corporate governance failure? Most of the responsibility for weak productivity growth can be traced directly to the risk–weighted capital requirements for banks concocted by Andy Haldane and his regulatory buddies at the Basel Committee for Banking Supervision.

Anyone who has walked on main-street and seen first hand how difficult it has always been for “risky” SMEs and entrepreneurs, without bankable collateral, to access bank credit, should have understood that to burden these even more by the fact they would also generate higher capital requirements for the banks than what “the safe” borrowers do, would affect productivity and economic growth.

Getting rid of these regulations that have effectively hindered millions of SMEs and entrepreneurs to access bank loan opportunities they would otherwise have been able to access, must of curse be the number one priority, not only in Britain but in the whole western world.

There will be much written in the future about how on earth regulators could come up with such daft regulations and how little the so much informed and so much connected world, questioned these.

On April 3, in FT, Anjana Ahuja, in reference to Robert Hare’s 1993 “Without Conscience: The Disturbing World of the Psychopaths Among Us,” wrote: “Uncertainty is unsettling and certainty is alluring. Beware anyone who offers the latter with charisma, especially at this jittery juncture. Arm yourself against the charlatans…not only criminal psychopaths but the white-collar kind — who overstate their abilities, denigrate subordinates, have a tenuous grip on truth and seek greater power with shrinking oversight.”

That convinced me that we should subject those technocrats taking decisions on such vital aspects as bank regulations, to a full psychological assessment before we allow them to proceed. We do mandate such tests for airplane pilots, even if they are engaged in much less dangerous activities for the world.

Frankly we can’t afford the luxury of having regulators so dumb that they set the capital banks should have in order to meet unexpected events, like ex ante perceived as very safe borrowers turning out ex post being very risky, based on the expected credit risks bankers already clear for.

And its not like I have not said it before. Here for instance on Martin Wolf's Economist Forum in 2009

@PerKurowski

C-suite experience can be just as irrelevant to real Main Street animal spirit as government bureaucracy experience.

Sir, Gillian Tett discusses the respective government and C-suite experience statistics of different government teams, and comments that those “83 years of C-suite experience” of Trump’s team and some of the policies announced, like tax cuts, “could ignite animal spirits”, “Team Trump unleashes animal spirits” January 6.

Sorry, the “animal spirit” of an extraordinarily well paid C-suite manager, the owner of a multi million dollar golden parachute, and who is invited to a great restaurant by a banker willing to discuss a billion dollar loan, might be for the purpose of repurchasing the shares of the C-suiter’s big corporation, can have as little of any real Main Street animal spirit, than any government bureaucracy lifer.

"Risky" SMEs and small time entrepreneurs, those who have their bank credit applications most often rejected, now most specially because of the risk weighted capital requirements for banks, those are the ones who really need to be present on Trump’s team, if he is ever going to have a chance to deliver on his popular populist promises.

In fact, C-suite managers could be too dangerous, since these are quite likely those who would be engaging the most in crony statism… in other words ”The Real Swamp”

PS. Came to thing about it. C-suite manager's animal spirits are more like animals in the zoo's spirits.

@PerKurowski

The Basel Committee for Banking Supervision is the stupidest and most failed oracle of our times

Dan McCrum writes about predictions, “How to grab hold of the conversation with a bold prediction” December 16.

Sir, I just want to notice, for the record, for the umpteenth time, that the risk weighted capital requirements for banks, more risk more capital – less risk less capital, are de facto a prediction by the regulators based on what they believe is the most dangerous for our banking system.

As is, from their desks, they predicted that what is ex ante perceived as risky, is risky ex post. Clearly that must be one of the stupidest and senseless predictions of our times.

Anyone with the slightest understanding of what happens on Main Street, would know that what poses dangers to the banking system is unexpected events, like devaluations, criminal behavior, or excessive exposures to what was ex ante perceived as safe but that ex post turned out very risky.

Sir, I’m sorry but I have to ask, since you seem to have swallowed that prediction hook, line and sinker, has anyone in FT’s establishment ever walked on Main Street?

Sir, you doubt it? Then dare ask the regulators the following questions and observe their silence.

@PerKurowski

Trump should make certain that “risky” Main-Street borrowers, like he, are invited to Basel, Davos or a Dagenham.

Sir, Robert Shrimsley writes: “the Financial Times has learnt the sensational and entirely fictional news that next year’s pilgrimage has been moved from Davos to the rather more earthy and economically deprived location of Dagenham in east London. The move was the brainchild of Sir Nigel Farage, who said it would help the global liberal elite get back in touch with the real world” “A Davos for the Donald — do it in Dagenham, mate” December 2. 

That’s not so farfetched: We have regulators who for the purpose of setting the capital requirements for banks, use risk weights such as: 0% the Sovereign, 20% what is AAA rated, 35% house financing, and 100% for We the People, like SMEs and entrepreneurs. 

Those regulations make it much harder for those who, precisely because they are perceived as riskier, already face great difficulties accessing bank credit. 

Around the world, over the last decade, those discriminatory regulations against have impeded many millions of SMEs or entrepreneurs to have access to bank credit, and if they got it, they have had to pay much more for it, in order to compensate for this unfair regulatory tax. 

I have no specific information about Trump or his enterprises own bank borrowings, but I am absolutely sure that, over the years, he has had to pay millions and millions more in interests to banks, than what he would have had to pay in the absence of these regulations. 

De facto the Basel Committee’s bank regulations represents a wall which impedes all fiscal and monetary stimulus to reach were it should, in order to create a new generation of jobs and move our economies forward, so as these do not stall and fall. 

Obviously “the risky” SMEs and entrepreneurs, have never been truly consulted about their needs, by for instance regulators in the Basel Committee or the Financial Stability Board, much less have they been invited to places like Davos. 

So, if anyone would want to make a reality of moving “Davos to the rather more earthy and economically deprived location of Dagenham”, the guest list should be much revised, and Dagenham marketed as “The best access to Main Street and the real economy” 

If Trump would then appear in a Dagenham, to speak out on behalf of “the risky”, then perhaps the whole world would learn to appreciate the fact that there are conflicts of interests that can be truly helpful… and should perhaps even be nurtured. 

Sir, I can almost already hear Trump shouting out: “Basel… tear down that wall!” 

@PerKurowski

The Main-Street understanding world’s MPCs most need, is that of the discriminated against bank borrowers, like SMEs

Sir, Huw van Steenis writes: “The private sector’s demand for loans, banks’ profitability, capital adequacy and risk aversion — all these affect not only financial aggregates but also financial wealth and the real economy through a variety of channels. Overlooking how banks function means the models that central bankers have relied upon are, by construction, overly simplistic fair-weather versions only.” “Time to put financial frictions at the heart of central bank models” November 1.

Of course, central banks must wake up to the frictions and distortions caused by the risk weighted capital requirements for banks. Though that is probably not what van Sttenis refers to, because, if he did, he should be very careful. He might wake up bankers, his bosses, from their realized wet dreams of earning the highest risk adjusted rates of return on equity, when financing what’s perceived as the “safest”

But Van Steenis also writes: “Every MPC should have members who have a real-world understanding of the plumbing of financial intermediaries. It’s time to put financial frictions into macroeconomic models.”. And Sir No! Careful there! “Huw van Steenis is the global head of strategy at Schroders”; and the Main-Street understanding Monetary Policy Committees around the world most need, is that of discriminated against bank borrowers, like SMEs and entrepreneurs.

@PerKurowski ©

Tim Harford, why should the 2008 bank crisis have reminded even an "undercover" economist of that “banking matters”?

Sir, Tim Harford writes: “If 2008 was a sharp reminder that banking matters, then 2016 has reminded us that politics matters too” “Prediction in an age of uncertainty” October 29.

Obviously this has to be a statement made by a deskbound undercover economist, or by one of his current bank regulation technocrats colleagues, and not by a main-street economist. If there is little as important to an economy’s real day-today, always, that is the access to bank credit, especially in a Europe so dominated by banks.

Here Harford also writes about predictions in age on uncertainty, without seemingly having understood that the Basel Committee’s capital requirements for banks were predicated on believing in a 100% world of certainty.

Harford refers to Nicholas Bloom concluding in that “uncertainty also causes recessions because it makes consumers, employers and investors hesitate before spending money. And if we all hesitate, that is exactly what a recession looks like.”

Sir, but what is more hesitation than that what bank regulators showed, when they decided banks should not be able to leverage as much with what they perceived as risky than with what they perceived as safe… as if banks had ever done such thing.

@PerKurowski ©

Gillian Tett, worry less about grey-hair’s casinos and much more about your young’s bank regulators manipulated ones.

Sir, Gillian Tett, as she should, becomes depressed when she ends up at an Atlantic City casino that “looked more like an electronic opium den for senior citizen.” “The rise of the silver slotter leaves me with a sour taste” October 29.

But, unless there is fraud, each one of those bets at the Atlantic City casino, has exactly the same expected pay out; namely a slight negative value because of the houses wins, like that when a zero comes up on the roulette. The cost of entertainment.

But out there in the other world, in the Main-Street, regulators have told banks that if they play it safe, like on black or read, like on sovereigns, AAA rated, or financing residential houses, they will earn much higher (expected) returns on equity, than if they bet on risky SMEs or entrepreneurs.

If Gillian Tett is concerned about the future of her children and grandchildren, that should depress her much more.

Sir, even though I have seen some few casino players fading away in absolute tragic destitution, I assure you that what the Basel Committee has done to the grey haired future of my, and your children and grand children, leaves me with a much more sour taste than thousands of Atlantic City casinos.

@PerKurowski ©

Regulators have been coopted by banks of “East”, forgetting the needs of those that banks of the “West” best serve.

Sir, Martin Wolf opines, “In the real world, central banks must remain our doctors of choice”, “The risks of central banks’ radical treatments”, May 26.

In it Wolf quotes Mario Draghi, president of the ECB, with: low interest rates “are not the problem. They are the symptom of an underlying problem, which is insufficient investment demand, across the world, to absorb all the savings available in the economy.”

But Draghi, the former chair of the Financial Stability Board, is the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision, and so he is more than a central banker, he is a bank regulator too… and as such he is definitely not my doctor of choice.

With Basel regulations banks have de-facto been told: “If you stay away from lending to the risky (like SMEs and entrepreneurs) then we will reward you with lower capital requirements for what is perceived, decreed or concocted as safe; which means that then you will be able to leverage your equity the most with assets of the “safe” type; which means that then you will earn the highest risk adjusted returns on your equity when doing business with sovereigns and the AAArisktocracy, and financing residential housing.” Does that not sound like a banker’s wet dream come true”

And to put that regulatory favoring of the safe into context, let me quote one who Wolf would not classify as a rightwing populist, John Kenneth Galbraith. In his book “Money: “whence it came, where it went” (1975), Galbraith writes:

“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.”

And so, to me, that clearly implies that the regulators of the Basel Committee are regulating in favor of, or under instructions from, the banks of “East” and the sovereigns, the respectfully affluent they meet in Davos; while completely ignoring the risk-taking needs of the new economy of the “West”, and for which any additional bias against perceived credit risk, condemns it to even more misery and doom.

In the West live the unemployed, the younger generations, the developing economies and all those clamoring for an opportunity to have a go at their dreams. 

The prime purpose of banks is to channelize efficiently excessive savings to the economy and, if you cut off the options, just because you do not like banks to take risks, those excessive savings must find other outlets or do nothing… all with expected unexpected consequences.

To top it up, regulators did not do their basic homework. Had they done so they would have understood that for the bank systems in general, what is perceived ex ante as risky, poses no danger at all. All big bank crises always result from excessive exposures to something wrongly perceived ex ante as safe.

PS. The following risk weights, for the purpose of determining the capital requirements for banks, evidence clearly he dangerous ideology and ignorance of the member of the Basel Committee.

Sovereigns 0% Citizens 100% can only be risk weights thought up by convinced raving mad statists. 

AAA rated 20% Below BB- rated 150% can only be risk weights thought up by those who have no idea of life on Main Street.

Per Kurowski

@PerKurowski ©

Does Lawrence Summers really think risk adverse bureaucrats can deliver “bold reform”?

Sir the pillar of current bank regulations is, as you should know, the credit risk-weighted capital requirements, which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky. And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main street.

And so you can understand how frustrating it is to read Lawrence Summers finding room to include “policies to promote family-friendly work” in his list of needed structural reforms essential to increase productivity, and not including the need of correcting the above mentioned regulatory distortion, “Bold reform is the only answer to secular stagnation” September 7.

“Bold reform” Ha! How can clearly overly risk-adverse bureaucrats carry out that? They only know about throwing money at problems.

PS. As Summers also refers to the need of “infrastructure investments” we should not forget that there is a prior need of making sure those “infrastructure investments” are done efficiently, in terms of costs.

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.

The government needs to provide venture capital for new banks.

Sir George Soros discusses “The right and wrong way to bail out the banks” January 23, as if bailing out the banks was our problem. We need to bail out our economy and if doing so we happen to bail-out the banks, great, if not hard luck.

At this moment we have a regulatory system for the banks that by means of the minimum capital requirements prioritizes risk avoidance. What we need instead is a regulatory system that helps us assure that the banks prioritize what is most needed.

In this respect, with government funds, I would create many new banks, with a fix capital requirement for any credit, for instance 6 per cent, and I would nominate a series of management groups to run these banks giving them the incentive of a generous purchase option for the bank in a couple of years, and asking for a secured indemnity in case of any particularly irresponsible act committed by any of these manager.

Also if these banks want to buy “toxic assets”, because they believe it is in their interest to do so, the better.

Sir I guess that it most probably must have been a very long time since George Soros walked down any Main Street.

This is no classic crisis

Sir I could not agree more with Mr William Jacobson that we need to concentrate more on the real economy as opposed to the financial economy, since the first has much better possibilities of delivering fundamental positive economic change, “Restore balance to financial and real economies.” November 24. This of course does not imply that Wall Street is irrelevant to Main Street.

But when Mr Jacobson says “that the current credit crunch is the aftermath of a classic leverage-fuelled financial boom” I must disagree. There I nothing classic in a crisis caused by investors having followed officially empowered risk surveyors, the credit rating agencies, to such a swampland as the one represented by the extremely bad awarded mortgages to the subprime sector in the US. That is by all means a first, and let us pray it also becomes a last.