The history I’ll tell my grandchildren has little to do with Philip Stephens’ history.

Sir, Philip Stephens writes: “Twenty-five years ago… the world belonged to liberalism. Soviet communism had collapsed. Historians will record the 2008 global financial crash as… the moment western democracies suffered a potentially lethal blow. The failure of laissez-faire economics was visible before the collapse of Lehman Brothers.” “The west is the author of its own weakness” Financial Times, October 1, 2021.

The history I will be telling my grandchildren is quite different.

Thirty-three years ago, the world belonged to liberalism and Soviet communism was collapsing. Historians will record how in 1988, one year before the Berlin Wall fell, the western world’s bank regulators introduced risk weighted bank capital requirements that distorted the allocation of credit. That put an end to any laissez-faire economics. With risk weights of 0% the government and 100% citizens, as if bureaucrats know better what to do with credit than e.g., entrepreneurs, communism took over. 

The 2008 global financial crash resulted from banks being allowed to leverage their capital/equity/skin-in-the game a mind-boggling 62.5 times, with assets that human fallible credit rating agencies had assigned a AAA to AA rating.

Yes, the west is the author of its own weakness… it much renounced to the willingness to take risks that had made it great. 

Sadly though, there are way too many interested in not disclosing what really happened… and therefore our banks are still in hand of insane risk aversion. “Insane”? Yes, because those excessive exposures that could become dangerous to our bank systems, are always built-up with assets perceived as safe, never ever with assets perceived as risky.

PS. My 2019 letter to the Financial Stability Board

September 2008 when the crisis bomb exploded is not as important as the dates when the bomb was planted

Sir, Philip Stephens writes: “The process set in train by the September 2008 collapse of Lehman Brothers has produced two big losers — liberal democracy and open international borders. Historians will look back on the crisis of 2008 as the moment the world’s most powerful nations surrendered international leadership, and globalisation went into reverse”. “Populism is the true legacy of the crisis”, August 31.

I agree with most of what Stephens writes, especially on how “central bankers and regulators, politicians and economists, have shrugged off responsibility” for the crisis. What I do take exception of is for the date of the collapse since much more important than when a bomb detonates, is when the bomb is planted. In this respect three dates come to mind. 

1988 when regulators announced: “With our risk weighted capital requirements for banks we will make our bank system much safer” and a hopeful world, who wanted to believe such things possible, naively fell for the Basel Committee’s populism.

April 28, 2004, when the SEC partially delegated their authority over US investment banks, like Lehman Brothers, to the Basel Committee. 

June 2004, when with Basel II, the regulators put their initially mostly in favor of the sovereign distortions on steroids, like for instance allowing banks to leverage a mind-blowing 62.5 times with assets that managed to acquire from human fallible credit rating agencies an AAA to AA rating. And EU authorities decided that all EU nations, like Greece should, in an expression of solidarity be awarded a 0% risk weight.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

Bank regulators violated the holy intergenerational social contract that Edmund Burke spoke about.

Sir, Philip Stephens writes: “Nostalgia has always had its place in politics. Respect for tradition is at the heart of Burkean conservatism. The deep irony about the now mythologised postwar decades, however, is that these were times when citizens looked unambiguously to the future.” “Nostalgia has stolen the future” July 27.

I am from 1950, and I do feel nostalgic whenever I think of all those savvy credit officers who were now substituted by equity minimization financial engineers.

When regulators, in order to make our banking system safe, ludicrously decided that what was perceived as risky was more dangerous to bank systems than what was perceived as safe, they distorted the allocation of bank credit in favor of the “safer” present so much that they de facto sacrificed that risk taking the “riskier” future needs. That is an egregious violation of that holy intergenerational social contract that Edmund Burke spoke about.

Those regulators are autocratic besserwisser populists who concoct their ideas, in a groupthink séance, in their Basel Committee mutual admiration club!

“Populists”? “We will safeguard your bank systems with our risk weighted capital requirements for banks” As if they knew what those risks were. Sir, can you think of something more populist than that?

@PerKurowski

The euro did not derive from a union but was used to build a union, and that still poses great-unresolved challenges.

Sir, I refer to Philip Stephens’“Trump, Italy and the threat to Germany” June 8.

Stephens writes: “Germany has been a “taker” — importing stability from neighbors and allies.” Indeed, but Germany has also imported the economic weaknesses from neighbors benefitting from a euro lower than what it would be if responding solely to Germany.

Yes, “The euro did not cause Italy’s economic ills, but it does close off the old escape route of devaluation”, except of course for those economies that, on the margin are the strongest, e.g. Germany.

Knowing they were benefitting unduly from the euro was perhaps the reason why the ordinarily much more disciplined Bundesbank Germans supported that insane notion of assigning, for the purpose of the capital requirements for banks, a risk weight of 0% to euro partners like Greece. For a while growing public indebtedness hid the costs of a stronger than suited for the weaker economies euro, but that lifeline has now clearly run out of steam.

What should the eurozone do know in order to survive? The answer must be finding a sustainable solution to the immense challenge that existed from the very start, when elites decided to build a union based on the euro instead of having a euro derived from a union.

Americans dream as American. How many Europeans dream as European?

Will Davos 2018, again ignore the financial weapon of mass destruction concocted by the Basel Committee populists?

Sir, Gillian Tett when commenting the concerns that will be expressed at the 2018 Davos meetings writes “The biggest perceived danger of 2018, in terms of impact, is that somebody uses weapons of mass destruction”, Holy moly! and ends with: “keep a close eye on what Davos is not worrying about enough this year: that pesky matter of global finance, particularly in places such as China.” “Populist swing alarms financial titans” January 19.

My concern though is that the technocratic and hubristic populism, proclaimed by the Basel Committee will again not be denounced in Davos, perhaps because doing so might be deemed ungentlemanly or ungentlewomanly behavior in such fine surroundings.

I refer of course to their promise that distorting bank credit with risk weighted capital requirements for banks will make our banks safer.

Higher capital requirements for what’s “risky”, has caused among other that millions of entrepreneurs, those on which so much of our economic future depends, have seen their credit applications rejected or not even received by banks.

Lower capital requirements for what’s “safe”, has among other, helped to fuel house prices which has overloaded that sector with mortgages that, within a future subprime economy, seem impossible to service.

And let’s not even talk about what the 0% risk weight awarded to sovereigns has done in terms of statism and of blurring the risk free rates.

Sir, no doubt about it, the risk weighted capital requirements for banks, is a weapon of financial mass destruction.

Did we not see it explode with AAA rated securities that banks were allowed to leverage 62.5 times with?

Did we not see it explode in Greece with sovereign debt that European regulators allowed their banks to hold against no capital at all?

If a regulator is incapable to provide a clear answer to: “Why do you want banks to hold more capital against what has been made innocous by being perceived as risky, than against what is dangerous because it is perceived as safe?” should he not be fired Sir?

http://theaaa-bomb.blogspot.com

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

PS. On the same page Philip Stephens writes:” The World Economic Forum and the Davos crowd pride themselves on their globalism has set itself the fearsome task of mapping “a shared future in a fractured world”. “Trump, Davos and the special relationship”. The risk weighted capital requirements, which favor refinancing of the “safer” present over financing the “riskier” future, is fracturing the world and causing the future to produce less and less of what could be shared.

@PerKurowski

The political establishment fell prey to an idiotic regulatory technocracy they did not dare to question

Sir, Philip Stephens writes: “Rising populism has been fed by a political establishment in thrall to unfettered capitalism”, “Why the liberal order is worth saving” February 10.

Nonsense! The political establishment fell prey to an idiotic regulatory technocracy they did not dare to question.

Some of the Basel Committee for Banking Supervision’s risk weights used to determine the capital requirements for banks are: The Sovereign 0%; We the People 100%; AAA to AA rated 20%, below BB- 150%.

That has absolutely nothing to do with unfettered capitalism all to do with unchecked and dumb statist intervention.

The liberal order went out the kitchen door of the Basel Accord, in 1988, before in 1989 the Berlin wall felt and the “Washington Consensus” saw light.

Here are some questions that have yet to be posed by someone able to force bank regulators to answer:

@PerKurowski

The west did not lose the world; it unwittingly gave up the world, in a process that began in London, 2 September 1986

Sir, Philip Stephens puts forward the argument that “The global financial crash of 2007-08 cruelly exposed the weaknesses of liberal capitalism” is one of the causes for “How the west has lost the world” October 14.

Nonsense! Liberal capitalism, and much of the willingness of the west to dare to hang on to its position in the world, was abandoned the day bank regulators decided that the risk weight for sovereigns was 0% while that of We the People 100%; and the day they foolishly decided to base the capital requirements for banks, on ex ante perceived risks, as if these risk were not already cleared for by banks.

I extract here from Steven Solomon’s “The Confidence Game” 1995.

“On September 2, 1986, the fine cutlery was laid once again at the Bank of England governor’s official residence at New Change… The occasion was an impromptu visit from Paul Volcker… When the Fed chairman sat down with Governor Robin Leigh-Pemberton and three senior BoE officials, the topic he raised was bank capital… the momentum it galvanized… produced an unanticipated breakthrough of a fully articulated, common bank capital adequacy regime for the United States and United Kingdom. This in turn catalyzed one of the 1980’s most remarkable achievements – the first worldwide protocol on the definitions, framework, and minimum standards for the capital adequacy of international active banks… They literally wiped the blackboard clean, then explored designing a new risk-weighted capital adequacy for both countries…”

The Basel Committee’s risk weighting introduced a regulatory risk aversion that, had it been in place before, would never ever have allowed the west to become the leading west. To top it up, it distorted the allocation of bank credit to the real economy, for nothing, since what never ever causes major bank crises, is what is perceived as risky. These always result from unexpected events or excessive exposures to something that was erroneously perceived ex ante as very safe, or if really safe, made risky by receiving too much credit. The global financial crash of 2007-08 was a direct result of these capital requirements.

Sir, our grandchildren are going to look back with a lot of sadness to that day and ask themselves, how could our grandfathers have done this to us? Didn’t they know they themselves did well only because their parents had dared to take the risks the future needs? Why did they only settle for having their banks refinance the safer past and present?

And Sir, if you are still around, they are going to ask you: why did not papers like the Financial Times speak about this for many decades?

@PerKurowski ©

Free market capitalism with regulatory controls on the free flow of bank credit, is an oxymoron

Sir, I am not discussing here Margrethe Vestager’s, the European Commission’s competition chief decision to order Apple to pay €13bn in back taxes to the Irish government. But, titling as Philip Stephens does his September 16 article, “How to save capitalism from capitalists” seems to me topsy-turvy.

What now most hinders free-market capitalism from delivering its full potential, is not capitalists, but inept and statist bank regulators.

Currently, for the purposes of the risk weighted capital requirements for banks, “The Risky”, like SMEs and entrepreneurs, those who cannot even afford a credit rating, are given a risk weight of 100%, while the government bureaucrats who are going to spend the tax revenues, or the public indebtedness, are risk weighted at 0%.

That translates into that government borrowings are subsidized, a fiscal revenue, with the subsidies, the taxes, paid by those “risky” that as a result have less access to bank credit.

So the real question should be: how to save free-market capitalism from state capitalists.

As is we really need a Robin Hood to come and rescue us from Sheriffs of Nottingham disguised as expert bank regulators.

But it is even worse, because those yet unpaid €13bn of Apple are not allowed to flow freely as bank credit even within the private sector; and that is because “The Safe”, the AAArisktocracy, have also been given a much lower risk weight, one of only 20%.

Sir, and if only those who rightly pressure taxpayers to correctly pay up, would also try to pressure with the same vehemence, the tax revenue spenders to correctly spend.

@PerKurowski ©

Nowadays they are much more sophisticated

PS.Basel Committee’s risk weighted bank capital requirements with decreed risk weights of 0% governments - 100% citizens have, since 1988, empowered a Bureaucracy Autocracy.

​​Global disorder: Meddling bank regulators make both what’s safe and what’s risky riskier, and hurt the real economy.

Sir, Philip Stephens writes about “Events that map a path to global disorder” July 22. He does not include the distortions in the allocation of bank credit to the real economy produced by those mindless risk-weighted capital requirements for banks.

By allowing banks to hold less capital against what is perceived safe than against what is perceived risky, banks can leverage more their equity, and the support they receive from the society, with the “safe” than with the “risky”. And that means banks expect higher risk adjusted returns on what’s “safe” than on what’s “risky. And that means banks will lend too easily to what’s safe and too little to what’s “risky”

And so the “safe-havens” like sovereigns, AAArisktocracy and houses will sooner or later become overpopulated and risky.

And so the “risky-bays”, like SMEs and entrepreneurs, will be less explored and, in order to compensate for the discrimination, will have to pay more for credit, which makes these riskier yet.

And so today billions in bank credit will be awarded in too favorable terms to those who do not deserve it, and thousands of SMEs and entrepreneurs will see their applications refused.

And so the real economy is mostly fed with carbs that makes it obese, and does not receive enough proteins to remain muscular.

And that brings on much more poverty than some of that to which Stephens refers to, like a Trump presidency or Brexit.

In 1999 in an Op-Ed I wrote: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system” They sure did!

But yet no one denounces regulators offering to make our banks safer with their meddling as being incompetent and dangerous populists.

@PerKurowski ©

Dare ask bank regulators: Why do you think that what is perceived as risky is riskier than what is perceived as safe?

Sir, Philip Stephen writes: “The crash and the subsequent depression broke the confidence of a generation of political leaders. All the guff they had learnt about a new financial capitalism, self-equilibrating markets and the end of boom and bust was shown to be, well, guff… bankers by and large got off scot free. Not so politicians who believed their own propaganda and embraced the laissez faire Washington Consensus as the end of history. Capitalism survived the crash, but at the expense of a collapse of trust in ruling elites” “Politicians are paying the bill for the crash” December 18.

What “laissez faire Washington Consensus”? That which with the Basel Accord prescribed a risk weight of zero percent for sovereigns and 100% for the private sector? That which with the risk-weighted capital requirements for banks completely distorted the allocation of bank credit?

The problem is that the trust of politicians in the ruling regulating technocrats did not collapse. As I have said many times, neither Hollywood nor Bollywood would have been so dumb as to allow the producers of a box office flop like Basel II to proceed, with the same scriptwriters, to produce Basel III.

I have a feeling politicians, Fed’s policy makers and perhaps even some FT journalists start to suspect that something is making the Fed and the ECB stimulus fail; and would therefore want to ask regulators: Why do you think that what is perceived as risky is riskier for the banking system than what is perceived as safe?

Why don’t they ask? Perhaps the explanation is one that John Kenneth Galbraith gave in “Money: Whence it came where it went” 1975, namely that “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”

PS. Sir, now when the credit quality of EM markets is deteriorating, banks holding such debt are required to put up more capital against positions taken up during sunnier days, putting a squeeze on bank lending, and so everything will become darker yet. Vive la procyclicité!

@PerKurowski ©

Europe hangs on to blissful ignorance about Greece’s tragedy. Its prime cause was not something especially Greek.

Sir, Philip Stephens argues that Greece exiting the euro would be more costly for Europe than helping it to hold “Europe will pay the price for Greece” July 10.

You know my opinion: Europe is unwittingly already paying the price Greece is paying, by holding on to senseless bank regulations that will only guarantee the dangerous overpopulation of safe havens, and the equally dangerous under exploration of risky but more rewarding beaches.

That is what you get when, instead of capital requirements for banks based on something that could be good, like jobs or like sustainability, you just base them on banks avoiding what is ex ante perceived as risky; and this even when you should know that banks would only go where it is perceived as risky, if risk-premiums are high enough and their exposure limited.

And again I can hear you say: “Nonsense, the crisis resulted from banks taking too much risks?”

And again I ask you: Sir, I dare you to identify just one bank asset that significantly contributed to this crisis, and against which banks were not allowed, by the regulators, to hold very little capital (equity), because it was ex ante perceived as safe?

Those regulations, which so dangerously distort the allocation of bank credit, are weakening the economies. Greece’s economy has already defaulted, too much credit to the public sector and too little to the private sector, if it is not housing.

Europe, dare to hear the truth about Greece! It was not the Euro either! 

@PerKurowski

Sometimes good bumper stickers are the best way to begin paving the road to a better world.

Sir, Philip Stephens writes: “the US lacks the resources and political will for ‘generational’ projects to transform the Middle East” “Republicans want a bumper sticker world” April 24.

The US Congress Iraq Study Group Report of May 2006 stated: “There are proposals to redistribute a portion of oil revenues directly to the population on a per capita basis. These proposals have the potential to give all Iraqi citizens a stake in the nation’s chief natural resource"

If that idea would have been implemented, you can bet the Middle East would have seen much good transformation… and not only there, other places, like Venezuela, would have benefitted immensely from such example.

Unfortunately the same Report then wrote: “Oil revenues have been incorporated into state budget projections for the next several years. There is no institution in Iraq at present that could properly implement such a distribution system. It would take substantial time to establish, and would have to be based on a well-developed state census and income tax system, which Iraq currently lacks.”

As if that was any real excuse. Any of the big credit card company could have set up a program that could have reached 50 percent of the Iraqis in 1 year, with the ambition of covering 100 percent in five years. What a missed opportunity for a real silver bullet.

But the US has other strengths… for instance with respect to oil revenue sharing why not ask Hollywood to make an inspirational movie.

It could for instance depict how a hypothetical country, one like Venezuela in which 97 percent of all that nations exports go directly into government coffers, becomes fundamentally transformed for the better, when some a “Hayek platoon” manages to allow the power of oil resources to flow directly to the citizens.

Recently Marco Rubio stated: “More government isn’t going to help you get ahead. It’s going to hold you back. More government isn’t going to create more opportunities. It’s going to limit them. And more government isn’t going to inspire new ideas, new businesses and new private sector jobs. It’s going to create uncertainty.”

And so that idea would seem to fit the political platform of any Republican who aspires the presidency, and, hopefully, also that of some democrats.

And a good bumper sticker: “Citizen’s should not need to live in somebody else’s business – End Natural Resource Curses” could perhaps be a way to begin it all.

And Sir, you know of course that if there is one bumper sticker I would also like to see in the next elections, that is “Stop bank regulators’ odious discrimination… against the ‘risky’ SMEs and entrepreneurs… that is un-American… that does not belong in the Land of the Free nor in the Home of the Brave”.

@PerKurowski

The pro-big-governments Basel Accord trumped the pro-private sector Washington Consensus

In July 1988 the Basel Committee on Banking Supervision put in place the Basel Accord, “The International Convergence of Capital Measurement and Capital Standards” Basel I.

Those standard imposed the following risk-weights, which would determine the equity banks needed to hold against different assets:

0% - For cash, central bank and government debt and any OECD government debt

0%, 10%, 20% or 50% - For public sector debt

20% - For development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (under one year maturity) and non-OECD public sector debt, cash in collection

50% - For residential mortgages

100% - For all private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and equipment, capital instruments issued at other banks

Those risk weights, applied to a basic equity requirement of 8 percent, translated into that banks were then allowed to leverage much more their equity when lending to governments, banks, developing banks and residential mortgages than when lending to the private sector.

And that meant that banks would find it much harder to obtain comparable risk-adjusted returns on equity when lending to the 100 percent weighted private sector than when lending to all other favored with lower risk-weights.

And that meant that the banks of the Western World were de-facto distorted into lending primarily to the public sector, to other banks, and to residential mortgages.

That of course meant that regulators tripped and fouled the efficient allocation of bank credit mechanism.

With Basel II of June 2004, all was made worse because different risk weights were also assigned then to the private sector based on credit ratings.

What did this mean?

That banks would allocate resources preferentially to the public sector.

That banks would allocate more resources for financing the house we live than for financing the creation of the jobs we need in order to pay the utilities and mortgages of our houses.

That banks would concentrate almost entirely on financing what is safe, refinancing the past, and stay away almost entirely from financing the riskier future.

And of course, it all started to go down hill from then.

And here we are more than 25 years later and read Philip Stephens’ "Why the business of risk is booming” without one single reference to what the regulatory forced risk aversion introduced in our banks have done or is doing to our economies.

To think that the Basel Accord with all its pro-big-government implications was introduced about the same time the pro-private sector Washington Consensus was discussed and vilified is truly mindboggling.

@PerKurowski

The Basel Committee’s credit-risk-avoiding-banks-driven-growth is a populist, fraudulent and dangerous prospectus

Sir, Philip Stephen writes “Greece should not be given a free pass, but the lesson of the post-crisis years has been that governments can go only so far in cutting budgets and improving competitiveness when their economies are shrinking and living standards are in free fall. Austerity-driven growth was always a fraudulent prospectus.” “The stand-off that may sink the euro” January 30.

Yes, but... the Basel Committee requires banks to have more equity when lending to what from a credit point of view is perceived as risky than when lending to what is thought to be safe.

That implies that the regulator, unless totally irresponsible or inept, which is of course a distinct possibility, believes that you can allow banks to earn much higher risk-adjusted returns on equity on what is perceived as safe (or can be dressed up as safe) than on what is perceived as risky, and still get the sufficient risk-taking the economy needs to grow.

I think that promising safer banks by means of methods that distorts the allocation of bank credit to the real economy, is dangerous, even criminal populism. And on this I have written to you more than a thousand letters over the last eight years.

But your absolute silence on this issue, unless there is fear and favoring involved, which is of course always a remote possibility, indicates there must be a total consensus in FT on that such risk-weighted equity requirements for banks, are entirely compatible with the purpose of banks helping to improve the competitiveness of their economies. Why do you not want to explain to me how you arrive at such conclusion? Please.

When banks earn more on what is “safe”, than on what is “risky”, the real economy suffers.

Sir Philip Stephens correctly writes “Europe faces a bigger threat than German caution”, December 13, and he correctly identifies that threat as “risk aversion”.

But there is an enormous difference between the consequences of natural risk aversion, like that which “comes with relatively higher standards and ageing population” and the consequences of an institutionalized pathological risk aversion… like that reflected in the risk-weighted capital requirements for banks.

If a society structures it in such a way that banks are allowed to earn much much higher risk-adjusted returns on equity when lending to what is perceived as “absolutely safe”, than when lending to “the risky”, banks will not allocated credit efficiently, and the real economy will wither away.

And the saddest part of that stupid risk-aversion is that it will anyhow bring down the banks (and perhaps the sovereigns with it) as banks will as a result, dangerously overpopulate all “safe havens”.

Regulators did not worship at the altar of the new financial capitalism, they helped to build it

Sir, Philip Stephens writes that central bankers “failed dismally [in regulating banks]… during the years before the crash. Their mistake was – all would be well if markets were allowed to operate freely”, “Summers or Yellen? The best Obama can do is toss a coin”, August 12. 

And that is precisely the kind of misunderstanding of what really happened which impedes us to move forward.

The regulators, by means of Basel II stopped the banks from leveraging more than 12.5 to 1 when lending to those considered “risky”, like the medium and small businesses, entrepreneurs and start-ups, but allowed the banks to leverage their equity 62.5 times to 1, or even more, when lending to what was considered “absolutely safe”, like to the "infallible sovereigns" and the AAAristocracy. 

Frankly, does that have anything at all to do with allowing markets to operate freely? Of course not! Regulators did not worship at the altar of the new financial capitalism, they helped to build it, when an overdose of hubris led them to believe they could and should be the risk-managers of the world… and which is precisely that type of “invested with supernatural qualities” problem Stephens refers to.

The sad truth is that if central bankers are now the new masters of the universe, then we’ve got ourselves some really shitty masters, and we better watch up. Really, how can one feel comfortable with a Mario Draghi, who acting as the chair of the Financial Stability Board, saw nothing wrong in banks lending to Greece holding only 1.6 percent in capital/equity?

PS. If Obama heeds Stephens´ advice he better allow a very innocent hand to toss a very well examined coin, live in a TV show. Otherwise no one in this skeptical world would believe the outcome was in the hand of God… and even so.

Was the Basel Committee, and the Financial Stability Board, created in order to bypass democracies?

Sir, what would be the possibilities of passing a law, in any European parliament, which would dramatically increase banks expected risk-adjusted returns on equity when lending to a sovereign or triple-A rated borrowers, and thereby stop banks from lending to those perceived as more risky, like small and medium businesses and entrepreneurs, or having these pay higher interest rates to make up for a regulatory competitive disadvantage; and all justified with the argument of making banks safer? None I would say… especially if a parliamentarian reminded law makers of the fact that no bank crisis ever has resulted from excessive lending to those perceived as risky, they have all resulted from excessive lending to what was wrongly perceived as absolutely safe.

But that is exactly what the Basel Committee has achieved by imposing their capital requirements for banks based on perceived risk. And this is why I do not agree much with Philip Stephens’ “Do not blame democracy for the rise of the populists” May 10, since democracies should never have allowed their power to be diffused in such a way. Governments and democracies are now in many ways kept hostages by their own creations... and suffering their own Stockholm-syndrome 

Was the Basel Committee and the  created on purpose in order to bypass democracies? I have no answer to that question… sometimes shit just happens. But, who have benefitted from it? Not “the risky”, that’s one thing for sure.

Europe what you really need is much less risk-taking austerity

Sir, Philip Stephens refers to the “high public debt suffocates growth” vs. “it is low growth that drives up debt” controversy. It all sounds so Lilliput vs. Blefuscu to me, “The New Deal for Europe: more reform, less austerity” April 26.

What currently suffocates the growth of the real economy are those crazy capital requirements for banks that create enormous incentives for banks to shun all what is officially perceived as “risky” like small and medium businesses and entrepreneurs, and to earn all their return on equity by lending to what is perceived as “absolutely infallible”. And, since in Europe the banks have normally been more in charge of financing the risky than those in the US, where more alternative sources of funds exists, Europe suffers the most.

Stephen refers to the existence of “ossified labour markets that lock out young people and discourage investments and innovations”, and he is right of course, but, when compared to bank regulations which lock out the “risky”-risk-takers in the real economy, their effects are sort of minor.

When banks have effectively been castrated, and are singing in falsetto, even low public debt does not help growth and, since currently the lowest capital requirements for the banks apply when these lend to the public sector, higher public debt level will result. It suffices to read Martin Wolf’s almost monothematic preaching for the public sector to take advantage of low interest rates, so as to borrow and take on large infrastructure projects, without understanding that those low rates are just a mirage, caused by regulatory subsidies paid for by the many extremely onerous missed opportunities in the real economy.

Europe, please inform your overly timid and dumb bank regulators that no major bank crisis ever has resulted from excessive bank exposure to the “risky”, they have all resulted from major exposures to what was dangerously perceived as “absolutely safe”.

In 2030, will America, “the Home of the Brave”, still be brave?

Sir, Philip Stephen concludes his “In tomorrow’s world, it’s the state versus the individual”, December 14, with observing that in order to reclaim powers lost to a more fragmented and globalized world, “governments will have to act in concert”. 

Indeed, but let us not also forget that acting in concert does not really mean that the results will be right. Just look at the massive mess was produced by one of the most important and concerted global efforts, that of regulating the banks and carried out through the Basel Committee for Banking Supervision. 

In fact, when in November 1999 in an Op-Ed I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse, of the only remaining bank in the world” what I was referring to was precisely the possibility of regulators getting it wrong in a very concerted and therefore systemic way. 

One question I would like to ask the National Intelligence Council, since that will definitely determine much where the US will be in 2030 is the following: 

Their report “Global Trends 2030: Alternative Worlds” mentions: “Some analysts expect aging societies to be risk-averse … need to pay closer attention to creating sustainable pension and health-care programs in order to avoid long-term risks”. 

So, what could this mean to the willingness to take risks? Will the “Home of the Brave” be less brave? 

I mention this because the last decade I have been protesting how a senseless risk-adverseness, introduced by our baby boomer bank regulators into our banks, are making the banks create ever larger and dangerous obese exposures to “The Infallible”, and for the real economy equally dangerous anorexic exposures to “The Risky”, like the job creating unrated and not so good rated small and medium businesses and entrepreneurs. 

And this if unchecked will doom the economy of America (and of Europe) to stall and fall. 

Remember it was for very good reasons that, in our churches, we used to pray “God make us daring!”.

Don’t downgrade the rating agencies, downgrade the regulators.

Sir, already a couple of years into this crisis Philip Stephen shows a surprising lack of understanding of it, in his “Downgrade the rating agencies”, January 20. 

Suppose that human fallible credit rating agencies were able to produce absolutely perfect ratings, in terms of measuring the risk of default, and which are of course used by the banks to choose who to lend to, how much, and at what rate. 

But consider the fact that regulators imposed capital requirements for banks that were also based on the same ratings, and which functioned therefore like a hallucinogen, a veritable LSD; increasing the banker’s sensitivity to risk, so that he perceived a good ratings in a much brighter light, and a not so good ratings took on an even scarier appearance. 

As should have been expected by any independent regulator, not part of a incestuous group-think, the consequences were: 

A growing excessive bank exposures to what is officially perceived ex-ante as not risky, like the triple-A rated securities and infallible sovereigns, leading to a dangerous overcrowding of the safe-havens and; 

A growing bank underexposure to what is officially perceived as risky, like in lending to small businesses and entrepreneurs, equally dangerous, because of the lost opportunities to create the next generation of jobs for our grandchildren. 

So again it was not primarily the rating-message’s fault it was the fault of those who ordered how those rating-messages were to be read. Downgrade those regulators! 

Occupy Basel! http://bit.ly/dFRiMs