Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.

Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.Sir, Martin Wolf writes: “we are missing a profound transformation in how macroeconomic stabilisation will have to be conducted. Whether we like it or not, we must rely on active fiscal policy.” “Restoring growth is more urgent than cutting public debt” December 14.

Of course, we need active fiscal policy, but what about the private sector? E.g. we must be able to rely on effective allocation of bank credit. And that, because of the risk weighted bank capital requirements, is simply not happening. Two examples: 

Much lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats/politicians know better what to do with credit they are not personally responsible for than e.g. entrepreneurs. And unless we are communist, or in love with taking decisions with other people’s money, we know that’s not true.

Banks are also allowed to leverage their equity much more with residential mortgages than with loans to small businesses/entrepreneurs, those who create the jobs that helps service mortgages and pay utilities. That favors the increase of house prices and weakens the economy. Insane!

Wolf argues: “It is essential to lock in low interest rates. The maturity of UK public debt has always been relatively long. The aim now should be to make it as long as possible, by taking advantage of exceptional borrowing conditions.”

But, those “exceptional borrowing conditions” are artificial. What would the free market rate on UK public debt in absence of QEs and the low bank capital requirements mentioned? And is not the difference between that rate and current ultra-low interests, de facto, not a well camouflaged tax, retained before the holders of those debts could earn it?

We all, Martin Wolf included, should be able to have confidence in that our banks are regulated by sensible and competent people. For a starter that requires regulators understanding that those excessive exposures that could be dangerous to our bank systems, are always built up with assets perceived as safe, never ever with assets perceived as risky.

Sir, July 12 2012, Wolf wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." 

Seemingly he still does not ​really ​understand what I meant.

My 2019 letter to the Financial Stability Board

@PerKurowski

The privileged subsidizing of sovereign debt that apparently shall not be named

Sir, let us suppose that as credit risks, banks perceived Martin Wolf and me as equally risky or equally safe. We would then, for the same amount of borrowings, be charged the same risk adjusted interest rate.

But then suppose that for whatever strange reason, regulators allowed banks to leverage much more with loans to me than with loans to Martin Wolf, and so banks would therefore obtain higher returns on equity when lending to me than when lending to Martin Wolf.

And also suppose that for some even stranger reason, Bank of England would buy my loans from the banks, but not those loans given to Martin Wolf.

Clearly the result would be that I would be able to borrow much more and at much cheaper rates from banks than what Martin Wolf could.

Would Martin Wolf in such a case opine that the higher interest rates he had to pay was the result of the market?

I ask this because Martin Wolf frequently makes reference to the very low rates that many sovereigns have to pay, and holds they should take advantage of it by borrowing as much as they can, in order to invest for instance in infrastructure.

And Martin Wolf seemingly refuses to consider those “very low rates” a consequence of regulatory favors of sovereign debts and QE purchases of it.

That distorts the allocation of credit in such a way that, de facto, regulators and central banks believe bureaucrats / politicians know better what to do with credit they’re not personally responsible for than for instance entrepreneurs. 

In the best case I would call that crony statism, in the worst outright communism. 

One day future historians will recount, and Paris’ Musée de L’Homme exhibit: “1988 Basel I: When Regulators introduced Financial Communism”

Well-invested small savings surpluses are better than big ones thrown away at fluffy sovereign spending projects.

Sir, Martin Wolf correctly points out “Without the shelter of the eurozone, the Deutschmark would have greatly appreciated in a low-inflation world” “How Germany avoided the fate of Japan” October 30.

Indeed it would have appreciated, but that does not necessarily mean that it would have been bad for Germany… or for the rest in the eurozone.

Wolf holds that Germans need to realize “that the euro is already working to their benefit, by stabilising their economy, despite its huge savings surpluses.”

Q. Without the euro would those huge savings surpluses exist? A. No!

Q. Without the euro could not whatever smaller saving surpluses have resulted much better invested? A. Yes!

Wolf points out: “Even at ultra-low interest rates, domestic private investment in Germany fell far short of private savings. [And] since the government too ran fiscal surpluses, in Germany, capital outflows absorbed all the private surplus [much through] German financial institutions, with their huge foreign assets”

And that’s their problem. Because of risk weighted bank capital requirements that favors financing the safer present over the riskier future, plus that insane debt privilege of a 0% risk weight assigned to all Eurozone’s sovereign debts, even though none of these can print euros, most of those German saving surpluses ended up financing mediocre eurozone governments… and building up such unsustainable huge debt exposures, that it will come back to bite all, the euro, perhaps the EU, and of course Germans too.

The day when Germans citizens realize the real meaning of that their banks need to hold around 8% of capital when lending to German entrepreneurs, but need zero capital lending to eurozone sovereigns, and that they will not be able to collect on those loans, those German citizens are going to be very wütend.

.And Sir, again, for the umpteenth time, Wolf returns to his: “The chance to borrow at today’s ultra-low long-term interest rates is a blessing, not a curse.” 

Wolf just refuses to accept that today’s ultra-low long-term interest rates, is an unsustainable artificial concoction that mainly benefits public debts, in other words, pure unabridged statism, based dangerously on that government bureaucrats know better what to do with credit, for which repayment they are not personally responsible for, than for instance the private entrepreneurs. When it comes to bank regulations a Communist Wall was constructed in 1988, one year before the Berlin Wall fell.

PS. The Euro had one characteristic that differentiated it from US$. That made me less optimistic as to its chances of success. The US$ is backed by a solidly unified political entity, USA. The Euro was aimed at creating unity and cohesion, not the result of it.

@PerKurowski

If QE seems to have turned into irreversible and the economy even needs a QE4, does that not point to something not going right?

Sir, Michael Howell writes:“Modern financial systems have grown dependent on huge central bank balance sheets… our concern today is a growing shortage of central bank liquidity caused by the deliberate unwinding of the QE policies put in place to replace the private sector funding that evaporated in 2007-08” “Liquidity drain will force central banks towards ‘QE4’” February 20.

What does this mean? That ever growing central bank balance sheets are now to be a standard feature in our economy? If QEs is to replace private sector funding, are we not heading into central bank statism?

What has QEs achieved? Because of the risk weighted capital requirements, the liquidity injected has resulted in way too little financing of the “riskier” future (entrepreneurs) weakening the real economy; and too much to the “safer” present (mortgages, buybacks, AAA rated securities and public debt) creating bubbles.

If it comes down to a QE4 let’s pray regulators admit their mistake and throw out forever the idiotic risk weighting.

Idiotic? Yes, consider the following tail risks.

The best, that which perceived as very risky turning out to be very safe.

The worst, that which perceived as very safe turning out to be very risky.

And the risk weighted capital requirements for banks kills the best and puts the worst on steroids… dooming us to suffer an weakened economy as well as an especially severe bank crisis, resulting from especially large exposures, to what was especially perceived as safe, against especially little capital.

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.

@PerKurowski

If Germany’s euro debt gets to be redenominated in Deutsche Marks, what would happen to its commercial surplus?

Sir, Kate Allen writes: “German bonds, or Bunds… are the eurozone’s safe asset… the spread against equivalent Italian bond yields to about 2.9 per cent.” “Tail Risk” February 19.

So if Bunds is the Eurozone’s safe asset, how come EU authorities assign it a risk weight that is just the same as all other Eurozone sovereigns’ debts, namely 0%? And this even when they all are indebted in a currency that is not really their own domestic (printable) one.

That 0% risk weight translates into that European banks do not have to hold any capital against debts of the Eurozone sovereigns… a clear subsidy... especially to those sovereigns most remote from earning that 0%.

So, had that not been the spreads of many eurozone sovereigns against Bunds would have been much larger, and in such case many of those sovereigns, like Greece, like Italy, like Spain, like Portugal would have had to borrow less, and would therefore have had to reduce their commercial deficits, reducing by that Germany’s commercial surplus.

Allen opines: “Investors need to put their money somewhere and [if there are not enough Bunds they are forced into substitutes which then rapidly become overloaded and suffer price bubbles.”

Indeed but when we consider that much of that investment money was supplied by ECB buying European sovereign debt, including Bunds, perhaps we should start by looking there before we might add fuel to a dangerous fire.

PS. Brexit,  the 0% risk weight and the EU

@PerKurowski

When the tide that turned safe homes into risky investment assets goes out, the wreckage will be horrific

Sir, Paul Mortimer-Lee in his letter “The tide that floated all ships is going out”, October 12, commenting on Martin Wolf’s “How to avoid the next financial crisis” (October 10), writes:“easy money has been pushing on a string as far as inflation is concerned”.

Not really, the problem is that, as I answered Martin Wolf in a letter published by FT 2006, is that when measuring inflation in housing, what is registered on the string is the cost of rental, not the prices of houses.

With low interest rates and especially low capital requirements for banks when financing the purchase of houses; unelected authorities have transformed houses from being safe homes into risky investment assets. When the tide goes out on that, the wreckage will be indeed absolutely horrific.

@PerKurowski

The regulators are responsible for the doom loop between Italy’s heavily indebted public finances and its banks

Sir, David Crow and Rachel Sanderson write: “Filippo Alloatti, senior credit analyst at Hermes, said that [Italian] banks were “super long” on Italian government debt, which accounts for between 13 and 15 per cent of their total assets… Such heavy exposure has revived the spectre of the doom loop, which describes the inextricable link between Italy’s heavily indebted public finances and its banks”, “Italy’s lenders feel heat as doom loop fears return” October 12.

In a letter published by Financial Times in November 2004 I asked: “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?”

And one of the most surprising things for someone like me who plays no formal role in the regulation of banks is why the world did not object to the horrors of banks regulators that, with Basel I in 1988, for the purpose of risk weighted capital requirements, assigned a risk weight of 0% to the [friendly] sovereign and one of 100% to the citizens.

That this regulation that so clearly favors crony statism was introduced a year before the Berlin Wall fell is evidence of how much can go wrong, if we allow unelected officials to engage in groupthink within a mutual admiration club.

Central bankers and regulators around the world have, with their especially low capital requirements against sovereigns, been setting our bank systems up to an especially monstrous crisis, and still they congratulate themselves for more resilient banks.

Just like they have set us up, to an equally especially monstrous disaster in waiting, with their especially low capital requirements for banks financing the purchase of houses; which has transformed houses from being safe homes into risky investment assets.

Central banks have of course made it all so much worse by keeping ultra low interest rates, and pouring huge amounts of QE liquidity on this structurally faulty regulatory fabric.

Our banks have been painted into a corner. What would happen if regulators suddenly announced that the risk weight of the sovereign had to increase from 0% to a meager 1%? 

If Italy goes down the tube will financial authorities lay the full blame on Italy, just as they did with Greece after they doomed it with that odious 0% risk weight?

Sir, you know I feel the Financial Times has kept complicit silence on all this.

@PerKurowski

The world will come to deeply regret central bankers avoided a cleansing hard landing in 2008... and opted instead for kicking the crisis forward (and upwards)

Sir, Merryn Somerset Webb asks: “The consequences of those solutions found in 2008, one of which was to make rich people richer in the hope they would spend more, look like they could end up neutering capitalism — the greatest poverty destroying system ever. Was avoiding a few more years of recessionary misery after 2008 worth that?”, “A post-crisis cure that has stored up economic pain” September 15.

Somerset Webb then proceeds to contrast the fortunes of a middle-aged man with a large mortgage in central London in 2008 and an equity portfolio [who] has had a brilliant decade, with the hardships of cash savers and pensioners suffering the impacts of low interest rates, and the many tenants who know they can never save enough for a house deposit. She is, sadly, so absolutely right.

In 2006, when troubles started brewing, I wrote a letter that was published by FT and in which I briefly but clearly (I think) exposed the benefits of a hard landing. 

When the FED, and later ECB, decided that the best thing to do was to kick the crisis can forward, and proceeded with a huge stimuli package that included foremost quantitative easing and ultra low interest rates, I accepted it. What was I to do? 

But what I never thought would happen was that all that stimuli would be injected into the economy, without eliminating the distortions that had created the crisis in the first place. And I refer here of course, for the umpteenth time, to the risk weighted capital requirements for banks; those that favor banks lending to what is perceived or decreed safe, like AAA rated securities, residential mortgages and sovereigns; and to stay away from the risky, like entrepreneurs.

Because of that, the stimuli had no chance of yielding sustainable economic result and we are now fretting and waiting for that huge growing by the minute can to roll back, with vengeance, on us, on our children or on our grandchildren.

Somerset Webb opines that “the political conversation these days focuses not, as it surely should, on wealth creation but on long-term wealth redistribution: new property taxes; rises in capital gains taxes; more corporate taxes; workers on boards; the nationalisation of industries in the UK; higher minimum wages; maximum wage ratios; the limiting of the rights of people who are non-resident for tax purposes, and the like.”

I agree. After besserwisser statist regulators have messed it up so completely, the last thing we need is for redistribution profiteers to expand the value of their franchise.

As I see it some of our priorities are:

First, to work our banks out of that corner into which regulators have painted them in, something which, as it includes a statist 0% risk weight for sovereigns, is easier said than done.

Second, initiate, even with very low amounts an unconditional universal basic income scheme. That will allow us to begin creating those decent and worthy unemployments we will need, before society begins to break down.

Third, stop the populist from promising heavens, by asking them to explain clearly how wealth, mostly invested in assets, could be redistributed without unexpected negative effects.

Sir, you know I am from Venezuela. I have seen my homeland taken to pieces in less than two decades, and the many Chavez and Maduro there are in the world frightens me. I guarantee you they will stop at nothing once they begin.

PS. Thank God Lehman Brothers collapsed when it did. Can you imagine if the AAA rated subprime mortgages securities craze, that regulators allowed banks to leverage a mind-blowing 62.5 times with, would had gone on for one or two years more?

Banks, except for limited liquidity purposes, should not be dabbling in sovereign bonds

Sir, Reza Moghadam vice-chairman for sovereigns and official institutions at Morgan Stanley, in order to “provide more stimulus to slower-growing economies” proposes that “ECB should lengthen the maturity profile of the bonds it holds of slower-growing economies [as] Other things being equal, a flatter yield curve is more stimulative, as it encourages investment, and, by raising the price of long-dated bonds, strengthens the capital position of banks that hold them.” “A new twist in the ECB’s reinvestment policy”, September 13.

That reads as Moghadam hopes that ECB, indirectly, in a veiled way, helps to capitalize banks (and his department shine). It should not do so.

In my mind, if we want the real economy to stand a chance of sturdy and sustainable growth, banks should instead, little by little, be made to reduce the financing of public debt, most specially of its own sovereign, that to which they have been guided by very statist very low capital requirements. 

As fast as possible, banks should be allowed to hold the same capital when lending to entrepreneurs and small and medium businesses, as they are required to hold against sovereigns, residential mortgages and AAA rated securities. Only that way do the banks stand a chance to allocate credit efficiently to the real economy. 

In 2004, coming from a developing country, in a letter published by FT I asked: “How many Basel propositions will take before regulators start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.” That clearly applies now also to developed nations.

PS. Sovereign bonds, if so safe, at interest rates not subsidized by regulations, should primarily be available for pension funds and insurance companies.

@PerKurowski

Where would America be today had not bank regulators distorted credit and central bankers kicked the crisis can forward?

Martin Wolf, expressing concerns we all deeply share asks, “Who lost “our” America?” and he answers: “The American elite, especially the Republican elite… They sowed the wind; the world is reaping the whirlwind. “How we lost America to greed and envy” July 16.

I respectfully (nowadays not too much so) absolutely disagree. That because supposedly independent technocrats generated the two following events:

First, in 1988 regulators with their so sweet sounding risk weighted capital requirements, promised the world a safer bank system, but then proceeded to design these around the loony notion that what was perceived as risky was more dangerous than what was perceived as safe. That distorted the allocation of bank credits in favor of the "safer" present and against the "riskier" future. That must have stopped much of any ordinary social and economic mobility.

Then in 2007/08, instead of allowing the crisis to do its natural clean up, central bankers, starting with the Fed but soon to be eagerly followed by ECB and other central banks, just kicked the can forward, favoring sovereigns and existing assets. Just as an example, with their repurchase of the failed securities backed with mortgages to the subprime sector, they saved the asses of many investors and banks (many European) while very little of that sacrifice flowed back to those who, in the process, had been saddled with hard to serve mortgages.

Martin Wolf, and you too Sir, would benefit immensely in trying to imagine how the world would be looking now, without that unelected and inept technocratic interference! What had specifically Republicans, or Democrats, to do with that interference?

As I see it if that had not have happened Trump would not even have been thinking of running as a candidate.

PS. An aide memoire on some of the mistakes with the risk weighted capital requirements.

@PerKurowski

It’s not the role of regulators and central banks to help governments fund their operations, behind the back of citizens

Sir, Kate Allen writes that “euro-area financial institutions” have reduced their holdings of public debt “17 per cent in the past two years [but] the ECB made nearly €1.5tn of cumulative net purchases of eurozone public sector bonds through its quantitative easing programme — effectively replacing the purchasing role that banks had played. “Post-crisis reforms force European governments to curtail size of debt sales” January 5.

It all forms part of the same statist subsidizing of public debt. 

What would sovereign rates be if banks had to hold the same capital against sovereign debt than against loans to citizens; and if ECB had not purchased “eurozone public sector bonds through its quantitative easing programme”? The answer would have to be rates much higher, which would send quite different risk-free-rate signals.

In 1988, with Basel Accord, statist regulators, with their 0% risk weighted bank capital requirements, began subsidizing immensely government borrowings. When the 2007/08 crisis came along, central banks, perhaps in order to hide own their regulatory failures, with their quantitative easing purchases generated, wittingly or not, new sovereign debt subsidies.

This has dramatically changed the economical relations between governments and private sectors. It amounts to statist hanky-panky behind the backs of citizens. Since besides needing servicing it consumes, for nothing really special, sovereign indebtedness space that could be urgently needed tomorrow, it might become deemed as high treason by future generations. Where this is going to end is anyone’s guess, but it sure won’t be pretty.

@PerKurowski

Now, ten years after, have not all quantitative easing and low interest rates just kicked the crisis can down the road?

Sir, Martin Wolf writes: “A… criticism is that easy money policies have worsened inequality, especially of wealth. But keeping the post-crisis economy in recession in order to reduce wealth inequality would have been insane. In any case, wealth inequality matters less than inequality of incomes, where the effect of raising asset prices is to lower returns for prospective owners, so improving inequality in the longer term. Above all, the worst form of inequality is to leave millions of people stuck unnecessarily in prolonged unemployment.” "Unusual times call for unusual strategies from central banks" November 13.

We are now into ten years of post-crisis. How can Mr. Wolf be so sure that if painkillers like Tarp and quantitative easing had not been prescribed, that we would now be in a worse position in terms of unemployment and in terms of inequality? Perhaps that all just kicked the can down the road, a can that could begin to violently roll back on us.

Sir, in August 2006 you published a letter of mine titled “Long-term benefits of a hard landing”. In it I wrote: 

“Why not try to go for a big immediate adjustment and get it over with? Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom in a couple of decades.

This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.”

I agree with that “wealth inequality matters less than inequality of incomes” but when Wolf then holds that “the effect of raising asset prices is to lower returns for prospective owners, so improving inequality in the longer term”, it would seem he would also agree with the benefits of a hard landing… that is as long as it is not on his watch.

In my Venezuela we have seen how millions of citizens who had reasonable expectations for the future, are now in desperate conditions. They have learned the hard way that no matter how much they might hold in assets, this means little if at the time you want to convert your assets into actual street purchasing capacity, there is no one there to buy these. And, as we sure have learned, to move from very good to very bad can be lightning fast. 

And I will keep on arguing… if government and regulators prioritize the financing of the sovereigns and of houses so much more than the financing of SMEs and entrepreneurs, we will be heading to a future of much poverty, lived out in an abundance of less and less maintained houses.

Wolf ends with: “given the instability of finance, today’s low neutral interest rates and the unwillingness of governments to use fiscal policy, the willingness of central banks to adopt unconventional policies may be all we have to manage the next big downturn.

Yes we might be in dire need of “unconventional policies”, but not necessarily from the central banks.

For instance we should urgently think of creating decent and worthy unemployments, to face the possibility of a structural lack of jobs. For that I would begin studying how to tax robots and artificial intelligence, and or how to reduce the margins of the redistribution profiteers, in such a way that it permits us to design and fund a universal basic income.

The UBI could initially be small, perhaps just US$ 100 per month, something to help you get out of bed, not so large as to help you stay in the bed, but the system has to be in place before social fabric breaks down, or before populists make hay of our problems.

PS. Today’s low neutral interest rates are artificially set low neutral interest rates

@PerKurowski

It’s hard to understand how central banks can favor so much safer biggies while making it harder for riskier smaller

Sir, Claire Jones reports “France’s central bank has bought bonds issued by LVMH, Bulgari’s parent company, helping lower the group’s borrowing costs. Under the terms of one of those bonds, LVMH can now pay an annual coupon of just 0.375 per cent to borrow until 2022. “Eurozone investment regains sparkle” October 5.

Unbelievable! How on earth can a central bank intervene and distort the allocation of credit to the real economy this way?

And to top it up, what is the capital requirement for a French bank when lending to LVMH or to Bulgari and what is it when lending to an unrated SME, that wishes to enter into the same market as these giants who can afford tens of millions of euros of investment?

Sir, is it only me that feels something is very wrong?

@PerKurowski

The interest rates on public debt are distorted by QEs and bank regulations. Seemingly no one dares to research that

Sir, Baroness Ros Altmann, when commenting on Martin Wolf’s (“Capitalism and democracy are the odd couple” of September 20, writes:

“Global central banks have artificially distorted capital markets for several years, by creating vast amounts of new money to buy sovereign debt. The supposedly “risk-free” interest rate, on which much of the system depends, has been undermined (and she concludes)… it is important to consider the democratic dangers to capitalism which prolonged QE may pose. ” “Disguised fiscal measures play role in democratic recession” September 22.

She is absolutely correct, and I have over the years written for instance Martin Wolf numerous letters on it.

But there is also the regulatory distortions provoked by the risk weighted capital requirements for banks introduced in 1988 with Basel I, and which assigned a 0% risk weight to sovereigns.

That meant at that time, and well into current Basel III times, that banks needed to hold little or no capital when lending to sovereigns; meaning banks were authorized to leverage immensely when lending to sovereigns; meaning banks could earn fabulous risk adjusted returns on equity when lending to sovereigns; meaning banks would lend too much and at too low rates to sovereigns.

So, when to QEs we add this through-the-back-door regulatory subsidies to government borrowings from banks (and now with Solvency II extended to insurance companies) it is absolutely clear we have no idea what the real cost of public debt is; and so we are all flying blind… and government bureaucrats having much easier access to bank credit than SMEs or entrepreneurs.

Last November, during IMF’s Annual Research Conference, I got at long last one of the major experts, in this case Olivier Blanchard, to agree with me in that “lets make sure that we have removed all the distortions which we can, which affect r (rates), so we have the right r”.

Sir, as of this moment that was the last time I have heard about it.

Why is there no response? Perhaps the answer is found in Upton Sinclair’s “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

PS Here is the link to my own response to that particular article of Martin Wolf

@PerKurowski

Progressives, is ECB’s Mario Draghi shamelessly insulting your intelligence, lying to your face, or just clueless?

Sir, Claire Jones writes: “Mario Draghi hit back on behalf of monetary global policymakers, dismissing growing criticism that their aggressive actions to support the economy had widened the gap between rich and poor”, Draghi said “We have every reason to believe that, with the impetus provided by our recent measures, monetary policy is working as expected: by boosting consumption and investment and creating jobs, which is always socially progressive” "Draghi denies QE hits poor hardest" October 27

Draghi is lying, that is unless he is dangerously clueless!

Besides being President of the European Central Bank, Mario Draghi is the former chair of the Financial Stability Board, and the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision.

Therefore Draghi must be perfectly aware of the odious discrimination against the riskier (including the riskier future) that, by favoring so much what is ex ante perceived as safe, is imbedded in the current capital requirements for banks. The sad truth is that bank regulators, the Basel Committee and FSB, have de facto decreed inequality in the access to the opportunities represented by bank credit.

The distortion that nefarious piece of regulation produces, impedes that any stimuli, like that of already tilted in favor of assets owners QEs, can reach where it best could help to create jobs. In other words regulators make banks finance “safe” basements where the young can live with their parents, not the new “risky” jobs they need for them to also become parents.

And Sir, for Draghi to boast his policies to be “socially progressive”, must be an insult to all those who like to define themselves as progressive… that is unless that term has a totally different meaning I am unaware of.

PS: Again, here is an aide memoire on some of the monstrous mistakes of said regulations.

@PerKurowski ©

BoE, if you really believe jobs come first, why not capital requirements for banks based on job creation ratings?

Sir, I refer to John Authers and Robin Wigglesworth “Big Read: Pensions: Low yields, high stress” August 23.

There we read that Baroness Altmann, the former UK pensions minister, said this month “The emergency to pension schemes has been caused by Bank of England’s quantitative easing policy of buying bonds…I don’t see how it is reasonable to ask companies with pension schemes to fill a £1tn hole and put money into their businesses as well. It doesn’t add up.”

BoE officials say they recognize the problem, but Andrew Haldane, its chief economist, says the central bank’s top priority must be to stimulate the economy. “I sympathize with savers, but jobs must come first”.

I don’t think so, from what BoE and their colleagues are doing, it seems much other, like keeping the values of assets high and borrowing costs for the government low comes first.

Sir, again, for the umpteenth time, the Basel Committee, the Financial Stability Board and other frightened risk adverse bank nannies, have mandated stagnation.

When you allow banks to hold less capital when financing what’s perceived as safe than when financing the risky; banks earn higher expected risk adjusted returns on equity when financing the safe than when financing the risky; so you are de facto instructing the banks to stop financing the riskier future and keep to refinancing the safer past… something which guarantees stagnation… a failure to develop, progress or advance… something which guarantees lack of employment for the young and retirement hardships for the old.

I would prefer not to distort the allocation of bank credit but, if I had to, then I would try to ascertain that bank credit goes to where it could do the society the most good; in which case I would consider basing these on job creation ratings and environmental sustainability ratings and not on some useless credit ratings already cleared for by banks with the size of their exposures and interest rates.

PS. If you want more explanations on the statist bank regulations that are taking our Western society down here is a brief aide memoire.

PS. If you want to know whether I have any idea of what I am talking about here is a short summary of my early opinions on this since 1997.

@PerKurowski ©

If one incorrectly accuses bank regulators of being totally inept, in public, one would think they would answer

Sir, Eric Lonergan writes: “Mark Carney is right: the traditional use of interest rates has run its course. For central banks to continue playing a role in preventing recession and raising growth, they will need to rethink the entire premise of monetary policy and aim their firepower directly at consumer spending and corporate investment”, “Interest rates are a spent economic force” August 13.

What central banks, and regulators, must really rethink is the whole bank regulatory framework’s pillar; the risk weighted capital requirements for banks. The problem is they are doing their utmost to avoid that Pandora box to be opened, because they know that would disclose their incredible technocratic-besserwisser disabilities.

Sir, you know what I think of these regulations, and you might think I am obsessed with the issue, which I am… but have you never asked yourself why my arguments are not even discussed? I have publicly accused Mark Carney, Mario Draghi, Stefan Ingves and many other of being absolutely inept bank regulators… and, if I was wrong, one could reasonably assume they would love to strongly correct me… in public.

PS. Sir, as you might be fed up receiving my many letters, you could also ask the regulators to answer my questions, and then you might get rid of me for good. Do you dare!

@PerKurowski ©

QE-forever cycle of fiscal stimulus, with current bank regulations, can only generate a dangerously obese economy.

Sir, Satyajit Das opines that “QE-forever cycle of fiscal stimulus won’t generate a recovery” August 2.

He is absolutely right! A recovery, to be for real, to be sustainable, requires a dose of risk-taking, which is currently being negated as a result of the risk-weighted capital requirements for banks. Allowing banks to leverage more with what is perceived as safe, than with what is perceived as risky, allows banks to earn higher risk-adjusted returns on equity with what is perceived as safe than with what is perceived as risky… with expected consequences.

And credit to what is safe, mostly refinancing the safer past, provides mostly carbs to the economy, which results in flabby obesity. It is credit to the riskier future that can provide the best proteins an economy needs to grow muscular and sustainable.

And for sure, the negative rates, a subsidy for "the safe" doing something with money, is a clear expression of how obese our economies have already become.

PS. A brief memo on some monstrous mistakes of current bank capital requirements.

@PerKurowski ©

The problem with banks holding too much sovereign debt is that no one dares tackle the regulatory favoritism of it.

Sir, I refer to Reza Moghadam’s “A modest proposal on QE”, June 12

The problem: “With banks… is that their balance sheets are stuffed with government paper… banks’ sovereign holdings remain sharply skewed to their own sovereign.”

Moghadam’s proposal: “the ECB could buy the excess bonds as part of a new QE programme. It would do so not based on a country’s capital share at the ECB, as is now the practice, but according to the excess exposure in each country’s bonds”

His expected result: “By delinking national banking systems from their own sovereigns, banks would end up holding a more diversified portfolio of sovereign debt.”

Sir, bank balances are stuffed with government paper not because of QEs, but mostly because ever since Basel I in 1988, that is what requires the least capital from banks scarce of regulatory-capital. And what use is it really for the real economies of Europe that their banks end up holding a more diversified portfolio of sovereign debt? Absolutely none!

In November 2004 in a letter published by FT I wrote: How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

It is a problem that regulators do not dare tackle, mostly because its recognition points to the fact that the bank regulators were never really qualified to regulate.

Here is an aide memoire on the horrors of risk weighted capital requirements.

@PerKurowski ©

What a government spends is a lousy proxy for what the citizens receive; it ignores redistribution costs and profits

Sir, Tim Harford writes that the idea of a universal basic income “appeals to three types of people: those who are comfortable with a dramatic increase in the size of the state, those who are willing to see needy people lose large sums relative to the status quo, and those who can’t add up.” “Could an income for all provide the ultimate safety net?’ April 30.

And while doing so he uses figures for UK’s social security spending of £217bn, and on health and education spending of £240bn. 

Over the last 15 years the poor in Venezuela have most surely received less than 15 percent of what they would have received, had only the oil revenues been shared out equally among all citizens as a universal basic income. In such a case, supporting a net oil revenue funded universal basic income could be done by someone like me, someone who wants the state to become much smaller, who wants poor people to obtain more, and who can add quite well.

The basic mistake the undercover economist makes in this case, is that he equates all social support received by the needed with what is spent on them. That ignores the redistribution cost and profits. A universal basic income, that would put aside in different account much of the redistribution, would help bring more transparency to what the real cost of real government’s functions are. In these Panama Paper days, when so much concern is expressed on the issue of tax evasion and tax avoidance, there is little mentioning of the possibility that pure tax revenue waste could add up to much more.

Many wealthy non-leftists do harbor serious concerns about the growing income inequality, not only because of a sense of justice, but also because they know it could come back to haunt them. And so for them, a universal basic income distribution of a pro-equality tax, and which would not have to cost more than 2 percent in administration fees, might seem as a quite reasonable way to go.

Also many of us concerned with climate change but who also do feel quite uncomfortable with all the climate change profiteers who surround most initiatives, could find a huge gas/carbon tax paid out by means of a universal basic income scheme much better. For a starter it would beautifully align the fights against climate change and inequality.

And please, whenever I mention “redistribution profiteers’, I do not only refer to those who get cold cash and favors, but also to those so much worse, those populist and demagogues who take out their share in political power.

By the way here is a question for the Undercover Economist: Would our economies be better or worse had the QEs been redistributed in equal shares to the citizens?

PS. The problem with governments is not they are monopolies. It is they are operated and exploited by too many monopolists.

@PerKurowski ©