Any new social contract for America needs to rectify and use equal risk weights for Sovereign and We the People

Sir, Anne-Marie Slaughter writes: “Where Roosevelt echoed Alexander Hamilton, emphasising a contract between citizens and government, Mr Ryan puts “society, not government, at the centre of American life”. Government exists to support citizens in solving their own problems. They agree on the imperative of genuinely equal opportunity for all but disagree on the scale and scope of government action necessary to achieve it.” “The world awaits America’s new social contract” January 18.

Since 1988, with the Basel Accord, for the purpose of setting the capital requirements for banks, the risk weight for the Sovereign, meaning the State, was set (by obvious statists) to a mindboggling zero percent. While the risk weight for We the Not-rated People, was determined to be 100%.

That subsidizes government debt, which is paid by lesser access to bank credit for SMEs and alike.

That, since it implies that government bureaucrats know better what to do with bank credit, puts the government squarely at the centre of American life.

Worse yet, American bank regulators have also extended the courtesy of lower risk weights to many foreign sovereigns, and to the AAA-risktocracy, wherever it lives.

I would prefer for instance a 75% risk weight for We the People and one of 100% for the sovereign but, if that’s not possible, the least the Ryans in America should do, is to be sure the state and citizens are weighted equally.

Sir, when I write this, there’s only one day left before 100% risk weighted citizen borrower Trump passes, as President Trump, to head the zero risk weighted borrower.

@PerKurowski

Ending bank regulatory stupidity in the US (and Europe), is a vital non-partisan issue

Sir, I refer to Conrad Black´s, “The Republicans can end 15 years of US stupidity” August 30. I would sure like to ask Mr. Black the following question: 

Suppose there was the potential of issuing trillions of dollars in “worthless real estate-backed paper certified as investment grade by the palsied lions of Wall Street”. 

What would the possibility be of that issue finding buyers if banks needed to hold 8 percent in capital against these, meaning being able to leverage their equity 12.5 to 1, instead of the 1.6 percent that was authorized by the bank regulators in Basel II, and which allowed banks to leverage 62.5 to 1? 

My answer to it would of course be: “That issue would have been almost totally unsubscribed!” That it was a tragic success, was only the result of sheer regulatory stupidity. 

If there is one thing that WMR and Mr. Ryan, or President Obama for that matter, or republicans and democrats alike, need urgently understand, is that capital requirements for banks based on perceived risk, does not only produce dangerous distortions in the markets, but is also something completely incompatible with a “Home of the Brave” (and with a Western world built with risk-taking).

Oops! Is this why Martin Wolf launches a visceral attack on Paul Ryan?

So now Martin Wolf has entered the American political debate, by basically calling Paul Ryan an impostor lacking of integrity, “Paul Ryan does not offer a credible plan for America” August 18. 

Why Wolf does it this way, I sincerely do not know nor understand. What purpose does it serve? Could it be because Wolf believes Ryan’s opponents are offering a more credible plan? If so, it would be really interesting to see him following up with an article on that. 

Personally, I feel that neither democrats nor republicans got it right, or even have a chance to get it right, before some fundamental changes in bank regulations occur. Currently the capital requirements for banks overly discriminate in favor of what is officially perceived as not-risky, prominently the State, the infallible sovereign, and against what is officially perceived as risky, prominently the citizens, like small businesses and entrepreneurs, and with that, there’s nothing to do… America, as a nation, as the “Home of the bBrave”, is going down! (Europe likewise) 

But those capital requirement with their discriminations based on officially perceived risks, managed by mean of risk-weights set by regulation bureaucrats, playing the risk-managers of the world, have never seem to bother Martin Wolf. He is perfectly comfortable with the fact that a Basel II, or a Basel III, allows the banks to give loans to “infallible sovereigns” against almost no capital at all. The only explanation for that must be Wolf fundamentally believes in the superior capability of government bureaucrats to wisely spend any funds advanced by future tax-payers. Oops! perhaps that is why he hits at Ryan?

PS. In reference to this comment someone wrote me: 

“Nobody who is serious about cutting huge deficits starts by slashing taxes on the wealthiest, very partially offset by slashing spending on health for the poorest. It is a fraud AND a reverse Robin Hood tax, on a spectacular scale.” 

And I answered: 

When if phrased that way, yes! But then someone, who by means of risk-weights which determine the capital requirements for banks, favors the officially not risky, most likely the rich, and thereby discriminates against the officially "risky", most likely the poor…should also qualify as most definitely a fraud and a reverse Robin Hood, on a quite spectacular scale.

Bank regulators, allow America to be the Home of the Brave

Sir, Jeffrey Sachs in “The US has already lost the battle over government” August 16, writes “ Mr. Ryan’s budget is nothing short of heartless in the face of the dire crisis facing America’s poor”. 

Hold it there Professor Sachs! I get too nervous about the poor, when someone recurs to arguing considerations based on the heart in order to service their needs. What was much worse for them than any heartlessness was the senselessness of bank regulators, that which caused the current crisis. 

By allowing banks to hold minimal capital when lending or investing in what was officially perceived as not-risky, regulators effectively discriminated against those perceived as “risky”, like small businesses and entrepreneurs, and doomed the banks to useless and obese exposures to what was or is still officially perceived as not risky. 

If there is anything that Republicans and Democrats should offer, as Americans, that is to wipe away the regulatory discrimination against what is perceived as risky and allow the US to fully be “the Home of the Brave” again… and that by the way would also do Europe a lot of good. 

And, if your bank regulator absolutely must mess around with market signals, so that they feel they have earned their salary, then why do you not ask them to base their capital requirements for banks on job creation and environmental sustainability ratings instead? That way they would at least serve a purpose.

Any country declines if it starts taxing risk-taking

Sir, congressman Paul Ryan writes many truths in “Republicans must return to free-market principles” July 20, the truest in my opinion being that of “the defeatism of those seeking to manage the west’s decline. 

But if the congressman would just pick up his phone and call a banker in his constituency, to ask him how much capital the bank needed to hold in order to lend to an unrated a more fuller understanding about the urgency of returning to free-market principles. 

With immense hubris bank regulators, thinking themselves to be the risk-managers of the world, started to allot risk-weights which determines how much capital a bank needs for any specific asset. And, that translates into extraordinary interest rate subsidies to what is officially perceived as not-risky and extraordinary interest rate taxes on what is officially perceived as risky. 

What drives a country forward is its willingness to take risk. If bank regulators skew the access to bank credit in favor of the not-risky, those already favored by risk-adverse bankers, then the country will stall, decline, and finally fall drowning in obese bank exposures to what is officially deemed as absolutely not risky.