If building houses where they are actually wanted, which we should, what do we do with the unwanted lot?

Sir, Robin Harding holds “What should not be in doubt is that supply limits are the single biggest problem with housing… reform the planning rules, and let people build homes where they are actually wanted.” “Planning rules are driving the housing crisis” August 15.

I agree, of course we should build houses where they are actually wanted, but the challenge of what to then do with the unwanted lot, poses major difficulties. 

It is not solely “the role of falling interest rates in pushing up house prices” that has caused houses to become financial assets. Much other preferential treatment is given to the financing of house purchases. Among other, because the financing of houses is perceived so safe by regulators, banks need to hold much less capital against residential mortgages than, for instance, against loans to entrepreneurs. (Those entrepreneurs who could create the jobs that would allow for mortgages to be duly serviced and utilities to be paid).

All that has helped house prices to shoot up and become the most important financial asset for way too many, whether for the owners, or for the banks or other who have helped many owners to extract whatever equity he had in his house.

As a consequence our society, our economies, have become mindboggling exposed to the need of keeping up house prices, while simultaneously needing house prices to become more affordable. To navigate well those waters will not be an easy task. 

Looking at some demographic realities perhaps what needs to be done is not to build more houses, but to build more senior citizens residences, thereby freeing many upstairs so that children could move up from the basements or other young move in.

@PerKurowski

No matter how much influence Warren Buffett might have, his is nothing when compared to bank regulators'

Sir, Robin Harding writes: “Mr Buffett is brilliant at buying into monopoly profits, but he does not start companies or gamble on new ideas. America is full of entrepreneurs who do. Celebrate that kind of business. It is the kind America needs”, “How Buffett broke American capitalism” September 13.

And Harding also argues “however much you admire Buffett, his influence has a dark side because the beating heart of Buffettism, is to avoid competition and minimise capital investment in the real economy”

But what do bank regulators do? They tell banks that if they lend to or invest in what is perceived as safe, they need little capital, Basel II even allowed banks to leverage 62.5 times with what corporate asset carried an AAA rating.

And they tell banks that if they lend to or invest in what is perceived as risky, like to “risky” entrepreneurs who “start companies or gamble on new ideas” then they need more capital which means lesser possibilities of high risk adjusted returns on equity, which means banks will not lend to these.

If that is not “minimizing capital investment in the real economy”, what is?

Frankly when compared to the destructive influence current bank regulators have on the real economy, whatever bad influence Warren Buffett might have is inconsequential.

And at least Warren Buffett makes profits, while current bank regulators just make everything worse. That since they completely ignore those ex ante perceived safe pose much more ex post dangers to banks than those perceived risky.

@PerKurowski

There’s a difference between unwanted recessions and recessions resulting from having other priorities than growth

Sir, Robin Harding asks whether we should use the term recession for an economy that is decreasing as a consequence of demographics. “Recession is a word in need of a rethink” November 14.

He sure has a point and perhaps we should measure economic growth on a per capita basis.

In the same vein, may I express doubts on whether we should use the term recession when the decreasing economic growth is a direct consequence of calling it quits… meaning not wanting to risk what we already got in order to get anything better.

Because, calling it quits that is what bank regulators did, when they allowed banks to earn higher risk adjusted returns on what is perceived ex ante as safe, than on what is perceived as risky.

I mean should there not be a difference between an unwanted recession and a recession that results from prioritizing other wishes?

Most current “recessions” are not unexpected consequences they are the natural results of someone meddling with the markets.

@PerKurowski ©

Ben Bernanke’s joke, will quite probably end up being on him.

Sir, Robin Harding reports: “Bernanke’ joke [‘The problem with QE is it works in practice but it doesn’t work in theory’] underscores questions on QE’s efficacy” October 13.

The joke might be on Bernanke because, as is, one could say it is just the opposite, QE might have worked, in theory, if in practice all the stimulus it provided, had not been channeled to where it was least needed.

As happened credit-risk weighted capital requirements for banks have blocked the way for QE liquidity reaching “the risky”, all those SMEs and entrepreneurs who could have helped to put some new sting into the economy.

As I see it we now have wasted a QE, and there is little we can do about that, so let us wait until QE has been soaked up, if it is ever going to be soaked up, to make any final evaluation of how the Fed and Bernanke did… let’s cross our fingers they did not too bad.

How can a statement issued by one of The-Not-Accountable, ECB’s Mario Draghi, be a “bold statement”?

Sir, Robin Harding and Claire Jones quote Mario Draghi with: “Now, as the banking sector is progressively cleaned up and the deleveraging process reaches its conclusion, banks will have new balance sheet capacity to lend, and our monetary policy will become even more effective”, “Draghi signals further action to prevent fall into deflation” October 10.

What is Draghi talking about? Has he not seen FDIC’s Thomas Hoenig’s recent “GlobalCapital Index” for the larger banks? Most of the banks in his Europe are still leveraged between 25 to 30 times to 1. 

Banks are still searching for strengthening their balance sheets by running to everything that requires them to hold less capital (equity). Unless the risk-weighted capital requirements for banks change, they will not be able to help any monetary policy to become more effective. 

And when Draghi states: “I expect credit to pick up soon next year”, your reporters qualify that as “a bold declaration”. What’s bold about that? Do they really think that Draghi will be held to that and fired if he is wrong? If there was any sort of accountability after the Basel II fiasco, Draghi, as the former chairman of the Financial Stability Board, would be long gone, not promoted to the ECB.

No Mr. Robin Harding. Fear of risks, dooms the economy to stagnation.

Sir, if I understand it correctly, Robin Harding wants us to pick one of two possibilities. That in which “the interest rates are too low, but the economy is fundamentally healthy, or the bleak one, in which case “central bankers have written the right prescription, but the patient´s condition remains perilously weak”, “Fear of bubbles hides the dangers of stagnation”, July 30.

Not so Mr. Harding! Fears, by regulators, of banks lending too much to what is perceived ex ante as risky, as if such a thing has ever happened, has doomed the world to stagnation. When banks, by means of risk weighted capital requirements are told they can earn much higher risk-adjusted returns on equity when lending to what is perceived as absolutely safe, there will not be the sufficient lending to what is perceived as risky, like SMEs and entrepreneurs, for the economy to grow.

No risk-taking... no growth... it is as simple as that!

Please, could somebody urgently brief Fed Chair Janet Yellen on the fact that there are different kinds of bubbles?

Sir, Robin Harding reports that Janet Yellen holds that the Fed “is more interested in having a resilient financial system that can cope when asset bubbles burst than it is in popping them through rate rises” “No need to lift rates to curb risk, says Yellen” July 3.

I would totally agree with her… if only we found ourselves within a productive bubble and not as now within a useless bubble. Let me explain.

There are bubbles based on a lot of risk taking which albeit sometimes they have very large costs, at least takes us forward. And then there are bubbles, like this one based on risk aversion, that though just as costly, keeps us, in the best case scenario, stamping waters.

For instance the dotcom bubble cost us a lot, but left some useful advances, while the housing bubble with its AAA rated securities backed with mortgages to the US subprime sector was pure pain with no gain.

Unfortunately it seems that no one has briefed Janet Yellen about the implications of risk-weighted capital requirements for banks.

What the World Bank most needs to do in order to end poverty.

Sir, I refer to Robin Harding´s article on the restructuring program of the World Bank that is currently being executed by its president Jim Yong Kim, “Man on a mission”, April 8.

I do not know much of the program but, as a former Executive Director of the World Bank, 2002-2004, I do know that whatever it contains, much more important for the bank’s quest of ending poverty, would be for it to speak out loud and clear against the risk based capital requirements for banks that have invaded current regulations.

The net effect of those capital requirements is to allow banks to earn much more risk-adjusted return on their equity on exposures deemed as “absolutely safe”, than on exposures deemed as “risky”. And as you can understand this is something which dramatically distorts the allocation of bank credit in the real economy.

By in that way favoring the access to bank credit of the “infallible”, these capital requirements add a new layer of discrimination against “the risky” poor developing countries, the World Bank´s most important constituency… and, within all countries alike, against “the risky” medium and small businesses, entrepreneurs and start-ups.

In short the world´s premier development bank needs to remind regulators of the fact that risk-taking is the oxygen of any development… and that there is in fact no chance whatsoever to fight poverty, or even to sustain an economy, in a risk free way.

And the World Bank, in its quest, should also be able to enlist the help of their neighbor the IMF, by reminding the world´s premier financial stability watchdog of the fact that major bank crises never result because of excessive bank exposures to what is perceived as “risky”, these always result, no exceptions, from excessive exposures to assets which were ex ante perceived as “absolutely safe”, but turned out not to be.

PS. This is not new. In April 2003, as an Executive Director, in a formal written comment on the World Bank‘s strategic framework 2004-06 I stated:

"Basel dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. Once again, the World Bank seems to be the only suitable existing organization to assume such a role."

PS. Also, though I am not a banker or a regulator, the following which I formally stated at the Board in October 2004, should serve as evidence that I might know something of what I am talking about:

“Phrases such as “absolute risk-free arbitrage income opportunities” should be banned in our Knowledge Bank. I believe that much of the world’s financial markets are currently being dangerously overstretched though an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

Professor Thomas Piketty: “Don't be so defeatist, it is so middle class.”

Sir, Robin Harding holds that “Inheritance should not be an alternative to hard work” January 6.

The setting is: “The lower the rate of growth, the smaller the percentage of society’s wealth created by those who are alive today, and thus, by definition, the larger the percentage that is passed on from previous generations… higher inheritances certainly exacerbate inequality.”

And that is derived from Thomas Piketty’s “eagerly awaited” “Capital in the Twenty First Century”. The book includes: “if the after tax return on capital is higher than the rate of growth in the economy, then all the heir and heiress need to do is save enough of the income from their inheritance… and their share of society’s wealth will rise”… ergo we must redistribute, and so we need “wealth taxes on a global scale”.

I do not agree with its general premise. An after tax rate of return on capital which is higher than the rate of growth in the economy, is something not really sustainable… unless other factors are in play. And, in this respect, I would just ask Mr. Piketty about what he believes would have happened to after tax returns on capital, without Tarps, QEs and all Fiscal Stimulus since 2007?

And also, what a horrendous vision it implies! That we should now only adapt to a shrinking economy, and give up all illusions about making it stronger and better, and just concern ourselves with that the last tree on our Easter Island we cut down is equitably shared? I can hear Downton Abbey’s Violet Crawley admonishing “Don't be so defeatist, it is so middle class.”

But of course I agree with Robin Harding in that developed (and developing) societies should “opt for the free-flowing meritocracy of the last century, not a return to the dynastic wealth of the one that preceded it.

But that, as I see it, has less to do with inheritance taxes and, at least currently, much more to do with bank regulations. You see the Basel regulators, with their risk-weighted capital requirements, do not want banks to take the risks which come with any “free-flowing meritocracy”, and instead to concentrate their exposures to the illusions of safeness of the “dynastic wealth”.

And by the way, anyone who thinks that the presence of after tax returns on capital higher than the rate of growth in the economy, would be sufficient to keep the value of an individual inheritance… has little knowledge about real life and about capitalism. Oh no! To waste an inheritance is very easy, but to keep the real value of an inheritance is, and should always be, hard work, no matter what the average interest rates are.

I wish more would concentrate more on the causes of inequality, than on the resulting inequalities. If not, and if we tax more all of the wealthy, all we will get is few oligarchs getting even more wealthy, not because of capitalism but because of crony capitalism.

Janet Yellen: Basel II-III risk-weighted capital requirements do not make banks finance the future, only refinance the past

Sir, Robin Harding congratulating Janet Yellen for her appointment to chair the Fed gives her some “unsolicited advice” in “A memo to the world’s most powerful economist”, October 12.

And so would I like to do. But, as Harding says, since Yellen must now be extremely busy receiving millions of unsolicited advices, I have given long thoughts to how I could condense, in a single tweet short phrase, all of my arguments against that horrible and stupid bank regulation mistake which unfortunately survived Basel II and made it into Basel III.

The title of this is what I came up with. Anyone with better ideas… please!

God make us daring!

PS. On this October 12, may I remind you that risk-weighting, is precisely the kind of regulations that stops an America from being discovered.

FT, don’t scare or bullshit us, with that September and October labor data is indispensable for the Fed to know what to do.

Sir, Robin Harding reports that “Experts fear loss of October data could influence tapering policy” October 5. Boy if that is what we depend on for the Federal Reserve to act correctly, we are, as the somewhat vulgar expression goes, most certainly up shit creek without a paddle.

He also quotes an expert saying “It’s like flying blind”. Come on, the Fed is flying truly blind by not knowing what would be the real interest rates on public debt, net of the subsidies implicit in bank regulations which allow banks to lend to the public sector against much less capital than when lending to citizens. Compared to that blindness the labor data would be, also in a somewhat vulgar expression, chicken shit.

That the Fed, not having a clue about what to do, would naturally like to have that data in order to explain itself, well that is a quite different proposition.

Though policymakers cannot decree the balance of the economy, they can surely guarantee its imbalance.

Sir, how economically efficiently the banks allocate credit is going to a very high degree determine the vitality and sturdiness of the real economy.

And current bank regulations, with capital requirements based on perceived risk, by allowing banks to earn much much higher risk-adjusted returns of equity when lending to “The Infallible”, like sovereigns, housing and the AAAristocracy; than when lending to “The Risky”, like the medium and small businesses, the entrepreneurs and start-ups, guarantees an inefficient allocation of bank credit.

Robin Harding, in “Americas economic growth is built on sand” September 11, writes that “Policy makers cannot prescribe the balance of the economy”. That is correct, but policy makers, by allowing for these dumb regulations, with its phony risk aversion, are indeed decreeing the imbalance of the economy. Obviously, Washington is not alone doing that, all Europe is too.

My one and only question to Ben Bernanke in the Congress of the Home of the Brave

Sir I refer to Bernanke’s recent declarations as reported by Robin Harding.

If I had a chance to direct only one question to Mr. Bernanke, in front of the Congress of the Home of the Brave, that would be:

Mr. Bernanke how long do you think a nation can remain strong with banks that avoid what is perceived as risky?

And, if he asked me what the hell I meant with that, this is what I would explain to him about banks.

Sir, banks are currently allowed to hold less capital when lending to “The Infallible”, like the Treasury and the AAAristocracy, than when lending to “The Risky”, like the small and medium businesses and entrepreneurs.

And that translates in “The Infallible” being able to produce banks higher expected risk-adjusted returns on their equity than “The Risky”. And that of course makes access to bank credit by “The Risky” much scarcer and more expensive. 

And I ask of course because “The Risky” are those who operate on the margin of the real economy, those who keep the economy moving forward, generating jobs and assuring the existence of some of “The Infallible” tomorrow.

PS. And besides Mr, Bernanke, for your information, "The Risky", precisely because they are perceived as risky, have never ever caused a major bank crises. That honor corresponds entirely to some of The Infallible who turned out not to be, 

Since when can a mistake in a paper be used as evidence of an opposite conclusion?

Sir, Robin Harding reports “Reinhart and Rogoff publish errata to paper on public debt and growth”. May 9. In it Harding writes that the 2010 paper on public debt and growth, by pointing out a significant effect on growth when public debt reached 90 percent of GDP, was widely cited as an argument for fiscal austerity. Since the paper was thought to be correct, I guess that was a quite reasonable thing to do.

What I cannot lay my hands around though is how the existence of a mistake in the paper can suddenly be turned into evidence which supports the opposite conclusion. I say this because I have lately read more opinions advancing that the 90 percent is no limit, than what I ever read about the original paper stating it was.

That said, since all this type of debt-sustainability discussions often sound to me like a torturer debating how much torture his victim can take before fainting… I will, without any religious fervor invested in it, keep on opining that public debt at 90 percent of GDP is high… although that will of course also have to do with who are the holders of that debt, nationals or foreigners, friends or foes.

And also, if the 90 percent to GDP has been reached by incurring in distortions, like requiring banks to have more capital when lending to the citizens than when lending to the government, then my previous “high” becomes a “VERY HIGH”

More than the public borrowing rate trapped at zero, it is the banks that are trapped into public lending

Sir, I refer to the “Austerity is hurting. But is it working?” debate, April 27.

The Yes camp, represented by Chris Giles advances by far the strongest argument by just stating the fact that with respect to “finances to fight crises or wars. Advanced economies had leeway in 2008; they do not now”.

The No camp, represented by Robin Harding, echoing Martin Wolf, refers again to the boost that fiscal policy could give the economy “when interest rates are trapped at zero”. Again no consideration is given to the fact that the infallible sovereign rate is “trapped” at zero in much by capital requirements for banks that are extremely biased in favor of public borrowings. And again no consideration is given to the fact that the “risky”, like the small and medium businesses and entrepreneurs, therefore need to pay banks exaggerated risk premiums in order to provide the banks with the same return on their equity; that is if they even can get the banks to take notice of them.

If the No camp would try to figure out what would happen if for instance bank were required to hold 8 percent on all assets, including sovereigns, then perhaps they would understand that more than the public interest rate trapped at zero, it is the banks that are trapped into public lending.

And if you do not think there is something wrong with that, you've got to be communists.

Do they really trust credit rating agencies less?

Sir, Claire Jones and Robin Harding quote Frederic Mishkin of the Fed saying on August 7, 2007 “The point of the subprime market is just that we now trust the credit rating agencies less,” said Frederic Mishkin. “Fed red-faced as notes reveal officials failed to grasp dangers of 2007” January 19. 

Is Mishkin really sure about that? Last time I looked the Basel Committee for Banking Supervision, on top of the capital requirements for banks based on perceived risks, and as perceived fundamentally by credit rating agencies, and which remain firmly entrenched, are now adding a layer of liquidity requirements also based on perceived risks, and also as fundamentally perceived by credit rating agencies.

When are our utterly naïve regulators going to wake up to the fact that in banking it is what is perceived as safe which can cause most risk since what is perceived as risky takes perfectly care of itself?

Bernanke’s “close to zero interest while unemployment is high” squares mostly with increased public sector employment

Sir, on your front page of December 13, we read about Ben Bernanke announcing “The US Federal Reserve is expected to keep its rates at close to zero until unemployment falls below 6.5 percent”. 

Excuse me Mr. Bernanke: Interests at close to zero for whom? For those for which banks can lend without holding much capital, “The Infallible”, triple-As and the sovereign, that might be true. But for those banks are required to hold many times more capital against, like all borrowers that do not have a credit rating or do not have a top credit rating, "The Risky", like small and medium businesses and entrepreneurs, some truly important job creators, that is certainly not true. The fact is that the real risk adjusted interest rate differential between “The Infallible” and “The Risky” must be widening by the minute, as bank capital grow scarcer and scarcer, as some of "The Infallible" ex-post join "The Risky"

And since according to the regulators the most infallible of them all, is the Government, and would therefore be the one receiving more and more of these “close to zero interest” funds, it would seem that the only way we will be able to have unemployment to fall below 6.5 percent is by creating public sector employment. Is this the unstated objective? If so, that is not very transparent.

Bernanke calls banks “overcautious”. He´s got to be joking, or insulting our intelligence.

Sir, Robin Harding reports “Bernanke says overcautious banks are slowing recovery”, November 16. Frankly, for someone like Bernanke, who belongs to the nanniest and sissiest bank regulatory establishment ever, this is either a bad joke or an insult to our intelligence. 

Our current bank regulators allowed banks to leverage their equity amazingly much when holding assets perceived as absolutely not risky, “The Infallible”, and therefore to shun away completely, from anything officially perceived as “The Risky”, because these could of course not provide the banks with an equal expected risk adjusted return on equity… and now Bernanke is calling the banks overcautious? Come on! 

If Bernanke want banks to return to their normal level of caution, all he has to do is to make the capital requirements for banks the same for all assets… and so clearly the ball is in the regulators hands.

When accessing bank credit some players are allowed five strikes while others only one

Sir, Robin Harding writes about Ben Bernanke and Sir Mervyn King being great fanatics of baseball and cricket respectively “Central bankers are right to take up the bat and ball” October 27. 

I do not know about cricket but, the current capital requirements, based on ex-ante perceived risks, one or the pillar of current bank regulations, would, if translated to baseball, signify the following: 

A batter who is perceived by one of the few authorized batting rating agencies as an extremely good batter, a Babe Ruth, one of “The Infallible”, the AAA rated, sovereigns like Greece, would be allowed five strikes instead of the ordinary three before he is called out, and, lousy batters like me, and perhaps like you, “The Risky”, the small businesses and entrepreneurs, would be called out after just one single strike. 

And let me assure you that would not do baseball, or us, any good, just as that has not done our banking system, and "The Risky" any good. And so let us at least make certain that when Bernanke leaves his post, he does not go into regulating baseball.

Give back to markets the role of risk management for the world which the bank regulators usurped

Sir, Robin Harding and Chris Giles when reporting on the current travails of central bankers they quote Donald Kohn of Brookings Institute saying “something deeper going on” referring to “something structural [that] has changed to hold back growth”, "Not so different this time", September 10. 

I guess you know what I am about to say. Yes! That “something deeper going on”, is the incredible discrimination in favor of what is perceived as “not-risky” and against what is perceived as “risky”, and which is present in the current capital requirements for banks based on perceived risk. 

Of course these central banker’s don’t know what to do, their instruments are all wrong, they have no idea of what the real market rates would be for the debt of their "infallible" sovereigns, if banks needed to hold as much capital than when lending to the more fallible citizens. 

Never before have bank regulators taken upon themselves the role of playing risk managers of the world. We need that role to be given back urgently, to the markets.