For inflation, where the money supply goes, matters a lot too

Sir, I refer to Martin Wolf’s “The monetarist dog is having its day”, FT February 23.

Yes, the money supply impacts inflation, no doubts but, when it comes to how much, that also depends on where that money supply goes.

If central banks inject liquidity through a system where, because of risk weighted capital requirements, banks can leverage more, meaning easier obtain higher risk adjusted returns on equity with Treasuries and residential mortgages, than with loans to small businesses and entrepreneurs, does that not favor demand over supply?

It does, and you should not have to be a Milton Friedman to understand that sooner or later that can only help inflate any inflation.

Wolf holds that “Central banks must be humble and prudent” Yes, and that goes for bank regulators too.

“Humble” in accepting there are huge limits to their knowing what the real risks in an uncertain world are; and “prudent” as in knowing bank capital requirements are mainly needed as a buffer against the certainty of misperceived credit risks and unexpected events, and not like now, mostly based on the certainty of perceived credit risks.

@PerKurowski

What would the Milton Friedman of 50 years ago, have thought of the Martin Wolf of today?

Sir, I refer to Martin Wolf ‘s “Friedman was wrong on the corporation” December 9.

Wolf writes that among his contributions to the ebook Milton Friedman 50 Years Later, and in relation to what a “good game” would look like, that this is “one in which companies would not kill hundreds of thousands of people, by promoting addiction to opiates; one in which companies would not lobby for tax systems that let them park vast proportions of their profits in tax havens; [and] one in which the financial sector would not lobby for the inadequate capitalisation that causes huge crises”.

Really? Would Friedman have promoted “addiction to opiates”?

Really? What is parked in tax havens? Profits, or titles to assets that are for the most, 99.99%, not parked in these tax havens?

But yes, the financial sector certainly lobbied for a low capitalization, but why should this sector be more blamed than those regulators who, based on the nonsense that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe, allowed it?

Wolf quoted Friedman with “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Yes, that’s true. But what should not be allowed though are for instance regulators setting much lower bank capital requirements when lending to the government than when lending to citizens, something which de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs.

Wolf writes about "unbridled corporate power has been a factor behind the rise of populism, especially rightwing populism". For me worse is much more unbridled technocracy power. What's more populists than a Basel Committee telling the world: "We know all there is to know about what's to our bank systems, so we have decreed credit risk weighted bank capital requirements".

Sir, Wolf says he used to believe Friedman, but that he was wrong. I just wonder what Milton Friedman would have thought of the Martin Wolf of today

A final question, Martin Wolf, what if corporations taking upon themselves to act in a “corporate socially responsible way” generated less employment and had less profits, and therefore paid less taxes?

@PerKurowski

Philip Augar, the ‘banking crisis of 2008’ did not dent at all Milton Friedman’s ideas that “sowed the seed of shareholder value”

Sir, Philip Augar quotes Milton Friedman with: “that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends . . . They are — or would be if they or anyone else took them seriously — preaching pure and unadulterated socialism….” “to make as much money as possible” for the owners, “while conforming to the basic rules of society”, “A call for boards to overturn the status quo” January 4.

And he follows up with “This sowed the seed of shareholder value... It took the banking crisis of 2008 and the ripple effect of financial disaster to expose the flaws of the theory”

What is Augar talking about? Banks, in order to make the highest risk adjusted profits, just followed the “basic rules of society”, in this case set by their regulators who, with their risk weighted capital requirements for banks told them: “Go out and make your biggest risk adjusted profits on what is perceived or decreed as safe”

And that is precisely what banks did, initially making huge profits, but also creating dangerously excessive exposures to “the safe” like AAA rated securities and loans to sovereigns who had been assigned a 0% risk weight, like Greece; which exploded.

I cannot understand how Augar can argue that has dented Milton Friedman’s thesis. If anything it clearly demonstrates the dangers of having some very few define and impose “the basic rules of society”.

He opines “boards need to develop a mindset that challenges rather than seeks to justify the status quo” That is correct, but does that not include papers like the Financial Times too?

Sir, why has FT not dared to challenge the status quo by for instance demanding regulators to give a straight simple answer, not disguised in incomprehensible technicalities, to the question of “Why do you want banks to hold more capital against what has been made innocous by being perceived risky, than against what is dangerous because it is perceived safe”?

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

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 

How can bank regulators think we are going to be safer by overpopulating safe havens?

Sir, Sir Samuel Brittan, August 31, from his desk, urges, “Come on Bernanke, fire up the helicopter engines”, and drop some money on the economy, without it having to go through the banking system. 

What a lovely idea, but, unfortunately, that money would too soon get trapped in the banks, and where current regulations would only make it available, as carbs to those perceived as not risky to grow more obese on, and not to those considered “risky”, like our small businesses and entrepreneurs, as proteins for muscle growth. 

And so, No! Before you do anything, be it QEs, fiscal deficits, or helicopter droppings, make sure you get rid of that silly regulatory discrimination against “risk”, and which is present in the current capital requirements for banks. That discrimination is placed on top of all other discriminations based on risk, and those we know, are not that few, especially in these uncertain times. 

Come on Bernanke, and all you other regulators, we are not going to be safer by overpopulating the currently safe havens… and if there are to be any helicopter droppings, please, be enablers, and make sure these happen over what is perceived as risky land.

Here is when I started, got hooked, on the subject of bank regulations 

My 2019 letter to the Financial Stability Board

Do not worry it looks like they are just staging it! Help!

Sir Sir Samuel Brittan clearly rapped all of us who dare to ask “how we are going to pay for it?” over our knuckles, “A framework for economic stability” December 5. We do not deserve it. In a world where the British Pound should have imprinted “In the British Taxpayer We Trust”, since that is all it has backing it, not asking the question could frighten away all economic stability. The quoted Harold Macmillan “Whatever the temporary difficulties from trying to run too fast, if we stand still, we are lost” might have benefited from having much less darkness around him than what exists now.

Having said that, Sir Brittan needs not to be overly concerned with any excessive prudence. In the US, all similar discussions on how to pay for it, and the screaming about the implications for the taxpayers, anyhow all end up with new tax-rebates being given.

Finally on Brittan’s quoting Friedman’s recipes for fiscal stability, how strange he did not comment on the absence in them of the regressive VAT.

When are business schools really going to make education their business?

Sir looking at the high tuition fees of many business schools one wonders if they are not setting themselves up to be sued by their graduates for failure in delivering what they promised as indeed the current incentive structure seems a bit misaligned with students investing their futures and paying for it and schools only collecting present values.

Lately there has been some talking about Income Contingent Loans as a way out for the students that get trapped between high education debts and unrealized earning hopes. The problem with these ICL is that they are mostly based on some government subsidies while it might be time for schools to really make education their business and share the risks by investing part of their fees in participations of their students’ future earnings.

Business schools might argue that they need all their money now to pay for their huge costs but, honestly, if they cannot manage to securitize those participation contracts and sell them to the financial markets when everything else seems to become securitized then they should perhaps not be allowed to call themselves business schools either.

The first who to our knowledge broadly advanced this idea was Milton Friedman in 1955 and lately Miguel Palacios of the University of California has also been writing extensively about what is called Human Capital Contracts. Their splendid ideas have yet not taken hold much, perhaps because the education providers themselves have lacked the incentives, but this might change rapidly, after the first suit.