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

Bank regulators from developed countries kicked away the ladder of risk-taking for the developing ones

Sir, Mohamed El-Erian writes: “the global economy is losing momentum and the divergence between advanced economies is growing… the majority of developed economies are yet to adopt meaningful pro-growth measures”, “Faltering developed world economies raise the risks for equity investors” November 21

Sir, Friedrich List in “The National System of Political Economy” 1885[1]wrote that free trade was the means through which an already industrialized country “kicks away the ladder by which it has climbed up, in order to deprive others of the means of climbing up after it.” 

In a similar way I would argue that the Basel Committee, with its perceived credit risk weighted capital requirements for banks kicked away from the developing countries that ladder of risk-taking that had been the oxygen for helping to get the developed countries where they are.

In 2007 at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I introduced a document titled“Are the Basel bank regulations good for development?”

In it I tried to explain that prioritizing as it does bank lending to the safer present over that to the riskier future is not how a nation can develop.

Sadly, nothing came of it.

But worse, the fact that the developed countries also promote these regulations means they are now reversing their development; and they will also have to confront especially horrible crises… those caused by especially excessive bank exposures to what is ex ante especially perceived as safe, but that ex post turn out risky, against especially little bank capital.

PS. A statement in 2003 as an Executive Director at the World Bank: “Risk aversion comes at a cost - a cost that might be acceptable for developed and industrialized countries but that might be too high for poor and developing ones. In this respect the Bank has the responsibility of helping developing countries to strike the right balance between risks and growth possibilities…. In this respect let us not forget that the other side of the Basel [Committee’s regulatory risk weighted capital requirements] coin might be many, many developing opportunities in credit foregone.”

PS. A 2019 letter to the Executive Directors and Staff of the International Monetary Fund.

God make us daring!

@PerKurowski

[1]List, F. 1885. The National System of Political Economy, translated by Sampson S. Lloyd from the original German published in 1841. London: Longmans, Green, and Company

In order to achieve any real economic and financial normalisation the regulatory distortion of bank credit must be eliminated.

Sir, Mohamed El-Erian holds that: “the move up in US interest rates has attracted lots of attention. It’s been blamed for a violent sell-off in stocks, and fuelled warnings not just of an end to the bull market in bonds but, perhaps, also equities. That, in turn, can engender concerns about the housing market, corporate funding, financial stability and economic growth. Yet the causes behind the rise in bond yields suggest that this is more likely to be part of a larger — and healthier — economic and financial normalisation.” “Don’t forget the good news behind higher bond yields” February 6

Let me be absolutely clear, before the credit distorting and danger enhancing risk weighted capital requirements for banks are eliminated, and the difficult and very delicate task of recapitalizing these completed, there will be no real economic and financial normalization.

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

@PerKurowski

Crony capitalism, which is really crony statism, includes many crony relations with central banks and bank regulators

Sir, Mohamed El-Erian writes about Jackson Hole meetings 2017: “The symposium left open questions for markets that, given very profitable adaptive expectations, are conditioned to rely on central banks to boost asset prices, repress financial volatility and influence asset class correlations in a way that rewards investors and traders more.” “Yellen and Draghi had good reason for Jackson Hole reticence” August 29.

So instead of relying on the real economy, Mohamed El-Erian, and I presume all his colleagues operating in the financial markets, rely more on what central banks do.

That is so sad, especially since the risk weighted capital requirements for banks, hinders all central bank stimuli to flow where it should. We now have buyback of shares, dividends financed with low interest rate loans, house prices going up, but SMEs and entrepreneurs not getting their credit needs satisfied because the regulators feel these are "Oh so risky!"

El-Erian reports: “Janet Yellen, chair of the US Federal Reserve, and Mario Draghi, president of the European Central Bank — [told] politicians about the importance of financial regulation”

That only happens because politicians have not dared to ask regulators questions like:

Who authorized you to distort the allocation of bank credit in favor of those perceived, decreed and concocted, as “safe”, like sovereigns and AAArisktocracy, and away from the “risky”, like SMEs and entrepreneurs?

Where did you find evidence that those perceived as risky ever caused major bank crisis? As history tells us, these were always, no exceptions, caused by unexpected events, like those ex ante perceived as very safe turning up, ex post, as very risky. 

PS. Do bankers love these crony relations? You bet! Being able to earn the highest expected risk adjusted returns on equity on what is perceived as very safe, must be a wet dream come true for most of them. And besides, by requiring so little capital, and therefore having to serve much less any shareholders’ aspirations, there is much more room for their outlandish bonuses

@PerKurowski

Current bank swimwear does not stop some to be caught swimming naked when the tide goes out, just the contrary.

Sir, Mohamed El-Erian ends his discussion of “the challenge facing those looking to generate high risk-adjusted returns.”, citing Warren Buffett’s observation that “only when the tide goes out do you discover who’s been swimming naked”. “How the great bull run can have a constructive end” May 23.

We already know a couple of those who will be caught swimming naked.

Sovereigns building up debt assisted by QEs, low interest rates and regulations that forces public debt down the throat of banks and insurance companies.

Corporations, because of low interests rates taking on high levels debt in order pay dividends and buy back shares.

Millennials and those following them believing there is something real out there that will take care of their older days.

Students who took on debt based on illusions about finding a good full-time job, those that are disappearing by the second.

How has all this happened? Regulators said “We have risk-weighted the oceans so there are no more tides.”… and the whole world believed their mumbo-jumbo.

But on the contrary, the risk weighted capital requirements for banks which distorted the allocation of bank credit to the real economy, helps only to guarantee that the tides will be stronger and more destructive than ever.

I swear, bad-luck weighted capital requirements for banks would take care much better of the real dangers, namely the unexpected.

PS. Here are some interesting questions to ask regulators, but only for those who would dare to hear the answers.

@PerKurowski

Millions of small loans not given to “risky” SMEs, only because of bank regulations, endangers our social stability

Sir, Mohamed El-Erian writes: “for things to continue as they are, you need to be confident that the economic, financial, political and social tensions spawned by low growth will not become the defining drivers of the economy. And that is increasingly unlikely in light of what is transpiring on the ground every day… If the political response continues to disappoint, low growth will give way to a recession while artificial stability in the financial system is replaced by disorder.” “Yet more low but stable global growth is unsustainable” September 30.

Absolutely! As I have been arguing in more than two thousand letters to FT over the years, we have been doomed to dangerous doom and gloom by bank regulators, as they have impeded the economy to breath that risk-taking oxygen that allows it to move forward, so as not to stall and fall.

Just think about the millions of small credits to “risky” SMEs and entrepreneurs around the world, that have not been awarded the last decade only because of Basel Committee’s stupid, dumb, senseless, useless, risk weighted capital requirements for banks.

To bridge that cliff of joblessness and hardships that it has and will have caused, I can’t think of anything else than a Universal Basic Income, a Citizen's Dividend, or whatever you want to call it. Of course that has to be duly funded, in much by reducing the margins of the redistribution profiteers, no funny money will do.

@PerKurowski ©

There’s a distortion of the allocation of bank credit to the economy that does not want to be named, but must be named.

Sir, Mohamed El-Erian writes: “BoE had already gone beyond consensus expectations… by skillfully combining four elements — an interest-rate cut, a reinvigorated and broadened asset purchase program (QE), a special funding scheme for banks, and effective communication” ,“Bank of England bond-buying needs a fiscal helping hand” August 16.

How sad BoE is not skillful enough to understand that a regulatory distortion of the allocation of bank credit to the real economy is blocking the chances to achieve stronger and more sustainable economic growth.

What distortion do I refer to? The risk weighted capital requirements for banks of course. That which allows banks to leverage equity more with assets perceived as safe than with assets perceived as risky; and thereby that which results in banks earning higher expected risk-adjusted returns on equity on assets perceived as safe, than on assets perceived as risky.

As a result too much of BoE’s, and other central banks, and fiscal stimulus, gets to be wasted; by mostly flowing to increase the value of existing assets (stagflation profiteering) and by that way hindering the opportunities of “risky” SMEs and entrepreneurs to gain access to bank credit.

What would happen to UK government borrowings if the sovereign UK, now assigned a zero percent risk weight, had to carry the same risk weight as We the People, 100 percent? To top it up there are many other statist pro-government funding subsidies.

Sir, we have to find a smart way to urgently work our banks out of these regulations, something made difficult by the fact our current bank regulators simply do not know what they are doing. Ask them and you’ll see.

Finally, for someone from a country suffering murdering inflation, Venezuela, it is a real shocker having to read highlighted in FT: “Owning a printing press, the BoE faces no funding constraint”

@PerKurowski ©

“Climb every mountain”? No way! The sissy Basel Committee instructs banks to “Climb only safe hills”.

Sir, Mohamed El-Erian refers to issues (such as Brexit) that “could change longstanding economic and financial relationships, affect the way economic agents interact with each other, fuel political anomalies and, in the case of unusual asset class correlations and valuations, undermine some of the institutions and basic tenets of the capitalist system.” “Period of artificial calm distracts from potential for storms” July 26.

And El-Erian writes: “These issues share a potential for fuelling so-called jump conditions in which there is a leap to a different set of circumstances, rather than a smooth and incremental evolution.”

Well let me remind El-Erian, and you Sir too, that one of the most impacting “jump-conditions”, was the introduction of the risk-weighted capital requirements for banks. These allowed banks to earn higher risk-adjusted returns on equity on assets perceived, decreed or concocted as safe, than on assets perceived as risky. And, of course, much of what was ex ante safe, became ex post dangerous, when too many went there.

Much contrary to Mother Abbess’ inspirational “Climb ev’ry mountain”, which in Sound of Music encourages people to take every step towards attaining their dreams, the Basel Committee for Banking Supervision, has de facto instructed banks to “Climb only safe mountains”.

PS. I dare you all to have a look at some of the mind-blowing mistakes of current bank regulations.

@PerKurowski ©

Day by day, the world is losing more and more, of that incredible valuable resource known as blissful ignorance.

Sir, Mohamed El-Erian writes: “These days, even small changes to market paradigms cause outsized price moves, contagion, and unsettling correlations among asset classes.” “Relying on central bank policy manoeuvres risks more volatility” March 8.

Indeed but that is not solely the result from what central banks do.

In 2001 in an Op-Ed I wrote: “The development of decision-making processes has benefits but also risks. Thus we see that the speed of information itself, which promotes quick and immediate response, can exacerbate problems. Before, those who took the problem home to study it, and those who simply found out late, provided the market a damper, which often might have saved it from hurried and ill-conceived reactions.”

When I was young and off to a boarding school in Sweden, with my parents living in Venezuela, I might have sent them one letter per year. They opened it and gladly determined that I was doing ok. Nowadays, if any of my daughters do not report to their mother sort of every six hours, all sort of possible volatility breaks lose.

@PerKurowski ©

Allocation of bank credit driven excessively by credit risk, does not lead to better growth and employment.

Sir, Mohamed El-Erian writes: “Since the global financial crisis, central banks have repeatedly resorted to experimental measures to repress market volatility — not as an end in itself but, rather, to help heal balance sheets and encourage the type of economic and financial risk-taking that can lead to better growth and employment outcomes.” “Central banks opt for the tug-of-war rather than the see-saw” June 9.

Not so! Credit allocation that is driven by credit-risk-weighted capital requirements for banks cannot produce “the type of economic and financial risk-taking that can lead to better growth and employment outcomes”. And clearly central banks have unwittingly (lets pray) or knowingly turned a blind eye to that.

@PerKurowski

You Greeks, in order to stand a chance, should begin by throwing out the statist/communist Basel Accord bank regulations.

Sir, I refer to Mohamed El-Erian’s “Missteps and miscalculations that could cost Greece the euro” March 26.

In it El-Erian decribes the challenges for Greece as “restoring economic dynamism, jobs and financial viability” and as tools to achieve those goals “three policy changes that many economists agree on: reducing excessive austerity, revamping structural reforms to unleash broader economic dynamism, and removing crippling debt overhangs that undermine existing productive activities and discourage the stimulus that comes with new investments.”

And I repeat, for the umpteenth time. You cannot restore dynamism, jobs and financial viability in Greece or in any country with bank regulations that, for the purpose of setting the equity requirement for banks, indicates the risk-weight of central governments to be zero, while the risk-weight of an SME or an entrepreneur is set at 100 percent.

Anyone who thinks that one Euro lent by a bank to Greece’s government will produce a sturdier economic growth, than a Euro lent to a Greek SME or a Greek entrepreneur… is a statist, a communist or most probably both.

Greeks (and all you other citizens) if you want your young ones to have a chance to get a good job in the future, you’ve got to urgently get rid of all statist/communist Basel Accord bank regulations.

@PerKurowski

I, a Venezuelan citizen, I am not going to do one iota for many of the Venezuelan creditors to get paid... much the opposite!

Sir in “Latin rebels turn to pragmatism” April 24, you write, “in Venezuela… After all, it is not unnamed acts of sabotage by ‘fascists’ or shadowy economic elites that have undercut private investments. The real culprits are price controls, expropriation threats and mismanagement. This is not ideology but rather a simple observation”.

Indeed, and if you know it, why should Venezuela’s sophisticated creditors not know it? Would these creditors have liked it if their own governments, misbehaving that much, would find financing that led them to saddle their own future generations with huge debt?

Just last Tuesday, April 22, Mohamed El-Erian, in “Beware the allure of cheapening Russian debt” wrote “For years…savvy investors ignored the populist anti west rhetoric of former President Hugo Chavez, focusing instead on the country’s solid oil revenues”… but he forgot to tell they also charged hefty risk premiums.

And so I ask, since these “savvy investors” also knew that there was at least 50 percent of the Venezuelans who did or do not agree with the government, and many even thought it to be illegitimate, do they really believe that if there is a change of power in Venezuela, these debts should be respected, no matter what?

Just to make the point… without implying any real comparison, let me ask… if the building of Auschwitz had been financed with an international sovereign bond issue, should the creditors expect those bonds to be repaid.

At least I, a Venezuelan citizen, am not going to do one iota, for many of the Venezuelan creditors to get paid. Indeed, much the opposite! ... and, just in case, I am no Argentinean Peronista.

No Mohamed El Erian, nowadays, extraordinarily dumb bank regulators, are making it all so much worse.

Sir, Mohammed El Erian in reference to banks betting on risky emerging markets holds that “In some ways today’s financial sector is little different from the one I first got to know decades ago… Yet not everything has gone full circle. Regulators and shareholders no longer allow banks to make such risky bets, even though they hold more capital” “Emerging world fashions that change with the seasons” February 15.

What? He must mean regulators no longer allow banks to make such risky bets… because banks are allowed to hold so much less capital when lending to something perceived as “absolutely safe” and therefore have to go where they can earn so much higher risk-adjusted returns on equity.

Banks have always lent primarily to what they have perceived as safe and tried to avoid what seems too risky. The difference nowadays is that regulations are helping banks to build up even larger and more dangerous exposures to what is ex ante perceived as absolutely safe but that could, foreseeable, become very risky ex post… and, when that happens, bank will then be guaranteed to find themselves naked with no capital to defend themselves with.

In other words, not everything is the same, extraordinarily dumb regulators are just making everything so much worse.

Our jobless youth is now paying for the meek aprės nous le deluge styled bank regulations

Sir, Mohamed El-Erian writes that “in the aftermath of the 2008 global financial crisis… governments and central banks interfered more in the functioning of the financial markets. By choosing where in the capital structure to intervene directly and what to influence, the official sector altered the risk-return characteristics” “Enter the sci-fi world of central banks and their zero rate action”, July 11.

He is correct, but that was not done only in the aftermath of the global crisis. Indeed, by allowing banks to hold much less capital for exposures to "The Infallible" than for exposures to "The Risky", and thereby allowing banks to earn higher expected risk adjusted returns on their equity when lending to “The Infallible” than when lending to “The Risky”, they caused banks to overexpose themselves to some not so infallible infallibles, holding little or no capital, ergo the crisis.

Given the frequency with which “The Risky” of yesterday becomes “The Infallible” of today, and “The Infallible” of today can turn into “The Risky” of tomorrow, in words similar to those of Mohamed El-Erian, these bank regulators lived on the risk taking of yesterday without creating the opportunities of tomorrow. I short a shameful aprės nous le deluge strategy that our jobless youth is already paying for.

What did Mohamed El-Erian really hear? Should we buy or should we sell gold?

Sir, with interest I read Mohamed El-Erian’s “We should listen to what gold is really telling us” May 21.

Unfortunately I could not understand what Mohamed El-Erian really heard... should we buy or should we sell gold at current prices?

Sorry, if I am a party pooper

Sir Mohamed El-Erian finds a silver lining for our current crisis in that “As the risks become clearer, a greater degree of international policy co-ordination may emerge”, “Era of policy activism opens door to global co-ordination” February 17.

I am sorry if I am something of a party pooper but may I remind him that this crisis was caused precisely by the international policy co-ordination in banking regulations that took place in Basel. Without the Basel Committee we would most certainly have had other bank crisis but none as systemic and severe as the current one.

Will the world trust the American taxpayer?

Sir Mohamed El-Erian in respect to the Federal Reserve being “prepared” to buy Treasury bonds asks “Will the world be comfortable with two US public agencies offsetting operations that ultimately must be supported by someone else?”, “Era of policy activism opens door to global co-ordination” February 17.

That is either a slightly coward or a too kind way to phrase the issue since that “someone else”, when push comes to shove, is no one else but the American taxpayer.

The US dollar instead of “In God we Trust” should state “In the American taxpayer we trust and thereafter in God’s will”. What will the markets do when they realize the real picking order?

Let our bankers become bankers again.

Sir Mohamed El-Erian says “We have to bring the banking sector back to life” January 21, because “Banks play an important role in any economy…efficiently channelling funds to productive uses”, and I believe he is even more right than he is aware of.

For years I have been arguing that our banks need to rescue the role they should play in the economy and which they lost when they were ordered by means of the minimum capital requirements based exclusively on risks, imposed on them by the regulatory authorities in Basel, to be risk-adverse entities and basically automated arbitrators trying to capture whatever spread existed between what the market was requiring in interest rates and what it should charge in accordance to the credit rating agencies opinions on the inherent risks.

Yes, now, more than ever, we need our bankers to become bankers again, and to regain the capacity of looking their clients in their eyes so as to explore on behalf of the society all the avenues that exist for the creation of decent jobs and sustainable economic growth. It is absolutely not too “late to stop banks becoming utilities”; for the simple reason that we cannot afford to let them.

Stop following Basel and the Fund into the land of the guaranteed systemic risks

Sir, Mohamed El-Erian and Michael Spence in “The Fund needs to refocus its agenda to be relevant” August 7 seems to suggest that the International Monetary Fund turns itself into a merchant bank type institution “facilitating the ongoing breakout phase in the economic development of emerging countries”. Before branching out into private sector terrain the Fund would do well not by refocusing but by focusing more on what is its current agenda.

For instance the IMF needs to be much more certain about what long terms effects there could be for the world of having promoted so much the idea of their buddies in the Bank of International Settlement in Basel with respect of ordering so much of the financial markets to follow the criteria of a few credit rating agencies. The developed world, with their current subprime mortgaged backed securities mess, is already getting some quite horrifying glimpses of what might lie ahead if it persists in following Basel and the Fund into the land of the guaranteed systemic risks.