World Bank, once again, the Basel bank regulations’ implicit risk aversion, attempts against any development.

Sir, Shawn Donnan writes: “In an interview, Paul Romer, World Bank chief economist, said the long-term effect of weak investment on developing economies was one of the main long-term challenges facing the global economy.” “World Bank warns on weak investment” June 5.

In October 2007, at the High-level Dialogue on Financing for Developing at the United Nations, in New York, I presented a document titled “Are the Basel bank regulations good for development?” It contained among many other the following paragraphs:

“It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope, since risk taking is an integral part of its economic vitality, but it is a real tragedy when developing countries copycats that and falls into the trap of calling it quits.”

“The World Bank, as a development institution, should have played a much more counterbalancing role in this debate, but unfortunately it has been often silenced in the name of the need to "harmonize" with the IMF. Likewise, the Financial Stability Forum is also, by its sheer composition and mission, too closely related to the Basel bank regulations to provide for an independent perspective, much less represent the special needs of developing countries.”

“For the record, let us state that although we have made the above comments from the perspective of ‘finance for development,’ most of the criticism put forward is just as applicable to developed countries.”

“To conclude, we wish to insist that no society can survive by simply maximizing risk avoidance; future generations will pay dearly for this current run to safety.”

Unfortunately my arguments have gone nowhere. As is, the wagons circled by bank regulators to fend off any criticism, has been impenetrable to truths such as those implied in John A Shedd’s “A ship in harbor is safe, but that is not what ships are for”.

PS. 2002-2004, as an Executive Director of the World Bank I did what I could to silence those sirens singing that the risk weighted capital requirements would make our banks, and our economies, safer. I stood no chance. Basel’s siren’s song sounded much sweeter.

@PerKurowski

Pray the Paul Romer/World Bank union realizes the dangers of regulatory risk-aversion and the benefits of risk-taking

Sir, I refer to the appointment of Paul Romer, one of the pioneers of “endogenous growth theory”, as the new chief economist of the World Bank, “The World Bank recruits a true freethinker” July 24.

Hopefully the Paul Romer/World Bank link could help both sides realize that risk-taking is the oxygen of any development, and so that then they could both push against the silly risk-aversion of bank regulators, that which only causes safe-havens to become dangerously populated, and risky-bays dangerously unexplored.

From what I have read the vital willingness to take risks is not included in Romer’s vision of endogenous growth; and I myself have failed miserably in convincing the World Bank, the world’s premier development bank, to stand up against bank regulators, the Basel Committee and the Financial Stability Board, as well as the IMF… though God knows how I tried… even as an Executive Director of the World Bank 2002-04.

“A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

God make us daring!

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

@PerKurowski ©

Nobel prizes should be recalled if wrongly exploited & tenure of most professors of finance revoked for incompetence.

Sir, I refer to Tim Harford “Down with mathiness!” June 6.

ONE: Harford writes: Paul Romer holds “I point to specific papers that deserve careful scrutiny because I think they provide objective, verifiable evidence that the authors are not committed to the norms of science.” and suggests: “that Nobel prize winners should be ejected from academic discussion because of their intellectual bad faith.”

If Romer is right about the first he is obviously right about the second. But I would like to take it even further than that. The Nobel prize is often exploited to the tilt by some of its winners to further opinions that bear no relation to the specific achievement for which they won it. That could also qualify as intellectual bad faith. They got the prize, they got the money, but they did not get the right to sell other nonsense as of Nobel prize quality to innocent bystanders. If the winners do not make clear when they simply opine like any other professional, their Nobel prize should be recalled, for the good of society.

TWO: By allowing banks to hold different percentages of capital against different assets depending on their ex ante perceived credit risk, and therefore allowing banks to be able to obtain higher risk adjusted returns on equity with some assets than with others; the regulators completely distorted the allocation of bank credit to the real economy. And that clearly is not a minor thing… that can bring down an economy and a society.

And the explanation the regulators give for what they did can be found in a mumbo-jumbo document where some monstrous mistakes can be identified, even though these hide behind what would be too much mathiness for any layman. As far as I know, tenured financial professors have not questioned it… and that alone should be reason enough to revoke their status.

Think of it this way. Suppose those who fabricate compasses did not like that ships where navigating western waters and decided to introduce some weights which tilted the directions more in favor of ships going to eastern waters. What would happen if teachers in seamanship did not even refer to this distortive compass manipulation when educating the captains to be licensed? Should those teachers not have their own license revoked?

@PerKurowski