A “Council of Historical Advisers” should advice the Council of Economic Advisers, on the origins of bank crises

Sir, Gillian Tett discussing Afghanistan’ Gandamak writes about the importance of knowing where you come from to know where you would want to go. “History lessons would be good for the White House” September 3.

Indeed, and I sure hope the “Council of Historical Advisers” comes to fruition, since the Council of Economic Advisers, and the Basel Committee, sure need some history lessons about the origins of bank crises.

Currently the pillar of bank regulations, is the risk weighted capital requirements for banks; more perceived risk more capital – less risk less capital.

And there is absolutely nothing in history that points to a banking crisis ever having resulted from what was, ex ante, when incorporated in their balance sheets, perceived as risky.

These have only resulted from unexpected events, or from the accumulation of excessive financial exposures to something erroneously perceived as safe. In fact the safer something is perceived, the worse the unexpected consequences that could result. Motorcycles are correctly viewed as much riskier than cars… and therefore much more people die in car accidents than in motorcycle accidents.

To sum it up, the risk weighted capital requirements for banks, dangerously distort the allocation of bank credit to the real economy, for no good reason at all. 

@PerKurowski ©

Niall Ferguson, watch it, the technocrats can be as populists, and as violent, as any other populists can be.

Sir, Niall Ferguson writes: “Politically, most of the world has never been more boring. Instead of the alarms and excursions of the past, we now have technocrats versus populists. Any violence is verbal and the technocrats nearly always win.” “The nasty Greek outcomes that democracy precludes” July 4.

Hold it there! The technocrats can be as populists, and as violent, as any other populists can be. It is hard to visualize the possibility of any Congress or Parliament proposing to favor with regulations bank lending to the government, or to those perceived as “safe”, and thereby create a violent regulatory discrimination against the fair access to bank credit of those perceived as risky, like SMEs and entrepreneurs.

That is what the technocrats of the Basel Committee did with their credit risk-weighted capital requirements for banks. With hubris and populism, they convinced some they could distort credit allocations to the real economy with no downside risks.

@PerKurowski

PS. Europe, remember, between 2004 and 2009, ECB’s technocrat Mario Draghi was OK with banks leveraging more than 60 to 1 lending to Greece.

Nial Fergusson, do not blame Keynes, Keynesian economists do not give Keynesian policies a fair chance to work.

Sir, Niall Ferguson holds that Keynesians have lots of egg on their face after the elections in the UK where the conservatives won, by a lot “Labour should blame Keynes for their election defeat” May 11.

Indeed they should have, but the reason for it has little to do with what Ferguson thinks or wants to imply.

No Keynesian policy on earth, could deliver real positive and sustainable results, when bank regulations impede the liquidity their spending policies generate, to reach those who could make the most of it.

In 1988 with the Basel Accord, sort of when everyone was busy attacking the Washington Consensus for its private sector bias, the regulators (for ideological reasons), for purposes of defining the equity banks had to hold against assets, decided that the risk weight of the infallible sovereign was to be zero percent, while the risk weight for lending to the fallible citizen was to be 100%.

With that the regulators privileged government bureaucrats’ access to bank credit over the others in the markets.

Later, in 2006, with Basel II, they “half mended” it, by stating that some AAArisktocrats were good enough to have a risk weight of only 20%.

And so then everyone met happily in Davos, where of course no lowly “risky” SMEs are invited.

And here we are with for instance Paul Krugman preaching us about inequality, but keeping mum on the fact that the risk-weighted equity requirements for banks, by killing the opportunities of the risky to access bank credit in fair terms, is a great inequality driver.

The real problem might be that many of current Keynesians want much more statist governments than Keynes ever considered, and so the zero percent risk weighting of sovereigns, attracts them too much… and so they do not want to even give Keynesianism a fair chance to work.

Of course, the free-market defendants who failed to see how distorted the allocation of bank credit has become; or who do not want to cross banker friends who just adore the concept of being able to leverage immensely what is ex ante perceived as safe, and therefore keep silence on all this, will also end up having egg on their faces. (You too Niall Ferguson?) 

PS. How can you give a zero credit risk weight to a debtor who, right in your face, is pursuing financial repression, inflation (just another kind of haircut)?

@PerKurowski

The gran coalition of the Basel Committee is a very dangerous bank regulatory populist.

Sir, I refer to Niall Ferguson’s “Scotland’s No echoes Europe’s Yes to gran coalitions” September 22. Ferguson concludes it with a: “From now on, I no longer need to deny my allegiance to the extreme center.

Well I have not done that for years, blogging from “The radical of the middle”, or “The extremist of the center”. And so I have no problem with that, except I have never done that in pursuit of a coalition, but more in pursuit of the “truths” which have been captured by the extremes. And it is not easy to swim in the middle of the river, being thrown rocks at from both shores.

And so when Ferguson writes “Populism has been popping up all over Europe since the financial crisis” I have to stand up and explain, again, for the umpteenth time, that in the field of bank regulations, there has never ever been something so populist, as the “risk-weighted capital requirements”.

The regulators of the Basel Committee for Banking Supervision fooled the world (and probably themselves too) into believing that all would be fine and dandy, if only we distorted banks to lend to what credit wise seemed, ex ante, to be “absolutely safe”; and stopped the banks from lending to “the risky”; no matter how useless the lending to the first, and how useful the lending to the latter could be.

And the world hailed, “Now our banks are safe”. But excessive lending to what was ex ante officially perceived as absolutely safe, like to infallible Greece, real estate in Spain and investing in AAA rated securities, against little or no capital, caused a crisis, and proved the regulators wrong, in record time.

Unfortunately that populism survives, now again, with Basel III, regulators insist in that with banks will be safer with credit-risk weighing… and this even though they must be aware of that banks are not lending to the risky SMEs and entrepreneurs, those who our economies most need to get going in order not to stall and fall.

Ferguson praises, “grand coalitions, [which] have turned out to bring stability”, as a great weapon against populism. Let us beware that grand coalitions, like that of the Basel Committee, is also capable of producing some extremely de-stabilizing populism.

Europe! Stop your regulators from playing risk managers… that is too risky

Sir, Niall Ferguson and Nouriel Roubini, in “Germany is failing to learn the lessons of the 1930s…” June 9, also fail themselves when not including the necessity of dismantling bank regulations that had the regulators playing risk managers handing out discriminating risk-weights which determined the final capital requirements for banks.

Had for instance a German bank, when lending to Greece, been required to hold the same 8 percent in capital it needed when lending to a German unrated small business, instead of a paltry 1.6 percent, implying an authorized leverage of 62.5 to 1, you can be sure that Greece would never have been able to borrow as much as it did.

How sad Europe is still being analyzed by looking at the facts using the wrong hypothesis… and therefore its crisis has not yet been fully understood.

Madame Guillotine could be better than assisted euthanasia

Sir, Martin Wolf is absolutely right when in “Do not learn the wrong lessons from Lehman’s fall” September 16 he writes that “No normal profit-seeking business can operate without a credible threat of bankruptcy”. But then he goes into some mumbling about living-wills and assisted euthanasia and though it sounds kind and gentle both these alternatives start when it might already be too late, and so we should not forget that what we could really require is for Madame Guillotine to enter swifter into action.

Since you are anyhow moving towards a clean slate, try a very low fixed mortgage rate.

Sir Niall Ferguson in “The age of obligation” December 19, presents clearly the dilemma between investing blood-sweat-tears and public indebtedness in trying to defend and build upon what exists or calling it quits and starting from scratch. It is a politically unsolvable dilemma and only time will tell. That said since no one is even talking about the subject of all the taxes that would be required to pay for defending what exists, at this moment I would have to bet on that we will see a clean slate sooner or later.

To have a chance to transition to the future without incurring in new public debt that will make the future unbearable substantial real haircuts have to be made in the rest of the economy and the faster and deeper the better since that leaves more room for the ok it hurt but now at least it is over feeling that is a prerequisite for all belief in a better future.

What would I do? With respect to the mortgages I would analyze the possibility of imposing by decree a very low fix interest rate on all outstanding mortgages in the US; and this because I believe that in that unfair and unsustainable idea that you could finance anything to anyone as long as the high rates that some were willing to pay were enough to compensate the losses of those not capable of repaying, lies much of the original cause for this crisis.

The above would give millions of lousy mortgages more chance of being duly serviced and perhaps even make the market value of these mortgages higher than what their current impossible-to-pay value are. In order to compensate those younger generations that have no houses, the same kind of financial facilities should be extended to anyone buying a repossessed house, at 70% of its previous price and that makes a 15% down payment. Just? No! But there is also little justice in public debt forgiveness.

And what about the AAA sails?

Sir Niall Ferguson, in “How a local squall might become a global tempest” August 8, tries to analyze how “primarily a US affair” and that according to him “has its origins in a US real estate bubble fuelled by easy money and lax lending standards” could extend globally and go nuclear in strength. I am sorry but he completely misses the story.

To talk as Ferguson does about howling winds and a perfect storm in the world of finance and ignore the existence of the new sails that were able not only to capture the smallest breeze but even to change the direction of the winds, is to turn a blind eye on what happened . The outlandishly bad mortgages given in the back-yards of some American cities would not have gone anywhere, and the capitals of the world would not have travelled to these back-yards either, had it not been for the “AAA No-Risk” sails hoisted up by the risk kommissars appointed by the financial regulators, namely the credit rating agencies.

Finally on “decoupling” what on earths is he talking about? The credit ratings risk assessments is what has coupled the whole financial world and these couplings, or shackles, are still in place. Q: Which was the first bank that lost out on the subprimes? A: A German bank. Q: And what have China, Russia and many other countries lost in official investments coupled to the subprimes? A: Anyone’s guess, though I have a feeling I would not like to be in their financial advisor’s shoes right now.

The US does not have to ride away in the sunset

Sir we certainly hope that anyone getting back to work on this January 2, 2007 reads the articles about America in the order you seem to suggest, first Niall Ferguson's scary "An Ottoman warning for America" and then the slightly more soothing "Prepare for a global economic downturn but not a disaster" by Wolfgang Münchau. Even so he must become extremely concerned.

I do not see things in America that bad since as life-long consultant with much workout experience I am used to immediately look for the reserve of important things that seems feasible to correct and that could generate a turn around. This particular reserve seems quite large in the US, and I am not just referring to the Iraq war.

If the US would though taxes raise their gasoline prices to European levels; put some corrections in their runaway health-sector costs; reform their bankrupting tort system; not keep over two million of their citizens in jails or prisons; accept that when the check arrives is not the best moment to sent away those who might help you pay it, like the immigrants, then we would have to conclude that the US has still a long way to go as the empire. Of course if the US can't find it in them to correct those things, it would indeed be riding away in the sunset in a The End, but then this would also not really be because of economic problems but because of something totally different.

Not Darwin but Frankenstein, not intelligent but unwise

Sir in “The great dying”, December 14, Niall Ferguson discusses the possibility that Darwinian evolution might explain the financial sector’s current difficulties although in the end he also clearly acknowledges that some “intelligent design” had to do with it.

When the bank regulators by means of the Basle Accord decided to drive risks (and creative destruction) out of banks, and imposed their exclusively risk based minimum capital requirements on the banks, they drove in fact banking business out of banks. When they simultaneously also appointed the credit rating agencies as their Blackwater type overseers of risks they also drove bankers out of banks.

The current turmoil is therefore much more a consequence of a Frankenstein’s not so intelligently meddling with the banks and Darwin has nothing to do with it that is unless of course you refer to the bank regulators themselves.