America, warning, industrial policy fertilizes crony statism

Sir, Rana Foroohar argues that America has chosen “to support a debt-driven, two-speed economy rather than one that prioritises income and industry” “Plans for a worker-led economy straddle America’s political divides” June 9.

“Debt-driven” indeed, but that has mostly been by prioritizing the safety of banks and the financing of the government.

In 1988 the Land of the Free and the Home of the Brave signed up to a statist and risk adverse bank regulation system. The Basel Accord favors “the safer present”, for instance lending to the sovereign and financing the purchase of houses, over that of “the riskier future’, like lending to entrepreneurs. 

In 1988 when a 0% risk weight was assigned to it, the US debt was $2.6Tn. Now it is $22Tn, and still has a 0% risk weight. And just look at how houses have morphed from being homes into being investment assets.

There’s no doubt the report issued by Marco Rubio, as the chair of the Senate small business committee, is correct in that “the US capital markets had become too self-serving and were no longer helping non-financial business... and that public policy could play a role in directing capital to more productive places — away from Wall Street, and towards Main Street.”

But that does not mean the US, in order to “successfully compete with state-run capitalism” like China, has now to turn to industrial policy and thereby risk being captured by even more crony statism.

Regulators assigned a 20% risk weight to what, because it has an AAA rating could really create dangerous levels of bank exposures, and one or 150% to what is below BB- rated, and which banks do usually not want to touch with a ten feet pole. So why should we believe that governments who appoint such regulators, have better ideas than the market on how to funnel capital to the most productive places, connecting the dots between job creators and education.

Therefore the public policy most urgently needed is that of freeing America (and the rest of the world) from that public policy distortion of the allocation of bank credit, that which builds up dangers to the bank system, and weakens the real economy.

PS. Germany has benefitted immensely from so many eurozone nations helping to keep the euro much more competitive for it than what a Deutsche Mark would be. Therefore it is not really correct to bring up the “success” of Germany as an argument in favor of more state intervention.

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

@PerKurowski

Odiously inept bank regulators consider ex ante that the entrepreneurs are less worthy of credit than house buyers

Sir, Daniel Davies discussing the work-outs of small business failures seemingly based on what some bad apples did, writes that “unpleasant realities [are swept] into grubby corners so that the banking system can look clean and efficient” “The finance industry’s Achilles heel”, June 27.

Sincerely, as one who has been proudly involved as a consultant in many workouts of all types for more than two decades in Venezuela, before the failure of that nation, I must say that I do not identify much with what Davies writes. For instance what’s wrong with that when real estate loans are renegotiated there is often a “change of valuation basis”? It would surely be more of an Achilles heel for the finance industry, if its valuation of assets did not change with changing circumstances.

Davies wants us to “Consider what happens when an entrepreneur is classified as a “distressed borrower” rather than a “start-up founder”… at that point, the person has been put into a category in which their word is not as good as other people’s.” 

But classifying an entrepreneur ex post, quite naturally, as a distressed borrower, cannot be remotely as bad as when regulators, ex ante, by allowing banks to leverage more when financing “safe” houses than when financing “risky” entrepreneurs are, de facto, saying that the word of an entrepreneur is worth less than that of house buyers. 

If there has been any sweeping of unpleasant realities into grubby corners, that is the role the regulators, with their foolishly risk adverse risk weighted capital requirements, have played in putting bank crisis and economic stagnation on steroids. Had for instance any credit rating agency assigned a 0% risk to Greece and with that doomed that country to a tragic over indebtedness, it would probably be hauled in front of judge… but there are the regulators still regulating as if they had done nothing.

And Sir, you know I think FT has quite shamefully helped the regulators with much of that sweeping.

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

@PerKurowski

In terms of a short-termism that harms the long run, few are as guilty as current bank regulators.

Sir, Jonathan Ford quote US academic Lynn Stout with “The pressure to keep share prices high drives public companies to adopt strategies that harm long-term returns: hollowing out their workforce; cutting back on product support and on research and development; taking on excessive risks and excessive leverage; selling vital assets and even engaging in wholesale fraud.” “Shareholder primacy lies at heart of modern governance problem” March 5.

Indeed, but I hold that low investments and poor productivity is also the result of regulators’ risk weighted capital requirements for banks based on ex ante perceived risks. These focuses on making the banks safe today, at the price of making it all worse off tomorrow, ex post. How? Because they dangerously push banks to overpopulate, against especially little capital, those safe havens that have always been the main threats to our banking systems; and because they keep banks from exploring those risky bays, those with entrepreneurs and SMEs, those that could give us the growth and the jobs of tomorrow.

@PerKurowski

Easing it for some bureaucrats, like with munis, does mean, de facto, making it harder for other, like entrepreneurs and SMEs

Sir, John Dizard writes “a bipartisan bank regulation reform bill that has passed a crucial Senate committee would require the entire federal regulatory apparatus to loosen the restrictions on counting munis as part of the high-quality liquid assets pool, and reduce the capital charges on holding muni positions.” “Vix horror show will not deter future suckers” February 19.

Sir, that would lead to more demand for munis, so that local bureaucrats can decide what to do with even more funds derived from debts our grandchildren will have to pay; which will naturally lead to less bank credit for those entrepreneurs and SMEs that could help our grandchildren to access jobs and revenues streams that could assist them in repaying these munis... and having a life. Great bipartisan job Senators! 

@PerKurowski

More food for the hungry and less food for the less hungry sounds logical and decent, that is unless the hungry are obese and the less hungry anorexic.

Sir, Martin Wolf writes: “More equity capital would make banks less fragile.” “Fix the roof while the sun is shining” December 6.

That is only true as long as we get rid of the distorting risk weighted capital requirements for banks. Though “more risk more capital - less risk less capital” sounds logical, that is unless “The Safe” get too much credit and “The Risky” too little. If that happens, both banks and the economy will end up more fragile.

Wolf writes: “The world economy is enjoying a synchronised recovery. But it will prove unsustainable if investment does not pick up, especially in high-income economies. Debt mountains also threaten the recovery’s sustainability”. Let me comment on that this way:

First: “a synchronised recovery” is a way to generous description of what is mostly a QE high that has just helped kick the crisis can down the road.

Second: The investments most lacking in the “unsustainable if investment does not pick up” part, is that of entrepreneurs and SMEs, those which have seen their access to bank credit curtailed by regulators. It is high time we leave the safer but riskier present and get back to the riskier but safer future.

Third: The “Debt mountains [that] threaten” are either those for which regulators allow banks to hold much less capital against, like sovereigns and residential mortgages; or those consumer credits at high interest rates that dangerously anticipate consumption and leaves us open to future problems.

Sir, let me again make a comment on Wolf’s recurrent recommendation of “Public investment to improve infrastructure”. He usually argues this in order to take advantage of the very low interest rates. That ignores that those low rates are not real rates but regulatory subsidized rates. If banks had to hold the same capital against loans to sovereign than against loans to citizens, and if also central banks refrained from additional QEs, I guarantee that the interest rates on public debt would be much higher.

Besides, given the fast technological advances, we do not even know what infrastructure will be so much needed in the future so as to be able to repay the loans, instead of just burdening more our grandchildren.

@PerKurowski

The safest route for UK might be to take to the seas in a leaky boat, abandoning a safe haven that is becoming dangerously overpopulated.

Sir, Martin Wolf writes: “A significant generational divide has opened up. Those aged 22-39 experienced a 10 per cent fall in real earnings between 2007 and 2017. They were also particularly hard hit by the jump in average house prices from 3.6 times annual average earnings 20 years ago to 7.6 times today. Not surprisingly, the proportion of 25-34 year olds taking out a mortgage has fallen sharply, from 53 to 35 per cent.” “A bruising Brexit could shipwreck the British economy” November 17.

Sir, I would argue that has a lot to do with the fact that banks are allowed to leverage much more their equity when financing “safe” home purchases than when for instance financing job creation by means of loans to “risky” SMEs and entrepreneurs.

Because that means banks can earn much higher expected risk adjusted returns on their equity when financing home purchases than when instance financing job creation by means of loans to SMEs and entrepreneurs… and so they do finance much more home purchases than risky job creations.

But Martin Wolf does not think so. He thinks bankers should do what is right, no matter the incentives. I think that is a bit naïve of him.

The way I see it, one of these days all the young living in the basements will tell their parents. “We’ve been cheated. You move down and we move upstairs.”

And it will be hard to argue against that. My generation has surely not lived up to its part of that intergenerational holy social contract Edmund Burke wrote about. 

Wolf ends with “The UK has embarked on a risky voyage in a leaky boat. Beware a shipwreck”. No! I would instead hold that its bank regulators made it overstay in a supposedly safe harbor that is therefor rapidly and dangerously becoming overcrowded.

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

Sir, I have no idea if Martin Wolf has kids but, if he had, would his kids have grown stronger if he had rewarded them profusely for staying away from what they believe is risky? I don’t think so.

PS. If Brexit goes hand in hand with a Baselexit, Britain will at least to better than now.

@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

Beware, data, even when in data trusts, can be exploited in very dangerous dumb ways.

Sir, John Thornhill writes: “A country’s ability to exploit data in safe and creative ways will increasingly determine its success. It is high time for institutional innovation to encourage the process...” “Data trusts can stimulate the digital economy” October 30

Indeed but if data is exploited erroneously that can also cause great tragedies.

For example, even though there must exist loads of data on what caused bank failures, the regulators used data about the failures of the borrowers; something which of course c'est pas la même chose.

That explains how they could risk-weigh that rated so safe as AAA, and which could therefore create excessive exposures that could endanger bank systems, with only 20%, while that rated so risky as below BB-, and which bankers do not like to touch with a ten feet pole got 150%.

As a result we got a crisis because banks held too many securities rated AAA and too high exposures to what was also assigned very low risk-weights like sovereigns, like Greece.

As a result millions of not rated SMEs and entrepreneurs, and who were risks weighted 100%, have had their credit applications denied, as banks cannot leverage their equity as much as with other alternatives.

Sir, I suspect that “The EU’s sweeping General Data Protection Regulation, which comes into force in May and will be adopted by Britain also [though it] imposes strict restrictions on data use, will probably not contain any language with respect to dumb data use.

@PerKurowski

Long term growth, development, in India and elsewhere, requires getting rid of Basel's regulatory risk aversion.

Sir, Eswar Prasad writes: “the real question for policymakers in India is not about how they can boost growth temporarily but how to create the environment to elicit private investment. Without that, durable longterm expansion will remain a mirage”, “Long-term growth in India depends on serious reform” October 17.

It is now ten years since at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document titled: “Are the Basel bank regulations good for development?”

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

And from what I have seen, in terms of Basel’s banking regulations, India is proceeding as if just as papist as the Pope.

The risk weighted capital requirements; those that dangerously distort the allocation of bank credit in favour of what is perceived decreed or concocted as safe, and against what is perceived as risky, like SMEs and entrepreneurs, are still going strong there.

That is the danger of empowering technocrats that are more interested in showing off to colleagues what’s fashionable in Basel than wearing what they should wear back home.

PS. The document referred to was also reproduced in India, in October 2008, in The Icfai University Journal of Banking Law Vol. VI No.4

@PerKurowski

For the complexity of banks, regulating demagogues gave us the simple solution of risk weighted capital requirements

Sir, Martin Wolf writes that current “upheavals [2007-08 Crisis, Great Recession] have, as so often before, opened the way to demagogues, promising simple solutions to complex problems… Brexit… Trump…Catalonia”, “A political shadow looms over the world economy” October 14.

Indeed, but much of the upheavals were caused directly by the members of an exclusive mutual admiration club of populist regulators, who sold the world that monumental piece of demagoguery of risk-weighted capital requirements for banks. “You all relax… we have weighted the risks.”

And though they never defined explicitly the purpose of banks, because seemingly they do not care about that, implicitly, de facto, their risk-weights indicate what the banks should do, and what not. That is so because less capital, means higher leverage, which means higher risk adjusted returns on equity.

So now we have: thou shall lend to sovereigns, to members of the AAArisktocracy and to finance residential houses; and thou shall not lend to risky SMEs and entrepreneurs.

And when the first results of those regulations, the excessive exposures to AAA rated securities, and to sovereigns like Greece appeared and caused crises, they did not rectify, they kept their risk weighting, and their central bank brothers kicked the cans down the road with QEs and ultralow interest rates.

So look at the stock market going up while becoming riskier because of the de-capitalization that results from taking up loans to pay for dividends and buybacks.

So look at house prices being overinflated, as evidenced by the lagging of rental values; while central bankers turn a blind eye to house prices not being in the consumer price index, but that rentals are.

So look at how sovereign debt levels are growing almost everywhere.

The monstrous silence about the distortions produced by bank regulations, like by influential opiners like Martin Wolf, is only helping to generate even more nutrient ingredients to all too many populists in waiting. God help us!

@PerKurowski

PS. My 2019 letter to the Financial Stability Board (FSB)

It is the lower capital requirements when lending to AAArisktocracy that stops banks from lending to “The Risky”.

Sir, Gillian Tett writes about the growing sector of private funds that, instead of banks, are now lending to the “riskier”, like SMEs and entrepreneurs. “Ham-fisted rules spark the creativity of lenders” October 13.

That is explained with: “these funds only exist because there is a tangible need: mid-market companies need cash, and banks are reluctant to provide this because the regulations introduced after the 2008 global financial crisis make it too costly for them to lend to risky, small clients.”

No! Before risk-weighted capital requirements were introduced, all cost and risk adjusted interest rates were treated equally whether these we offered by sovereigns, AAA rated, mortgages, small and medium unrated businesses or anyone else. Not now, and especially not since Basel II of 2004.

Now banks can leverage those offers more when lending to “The Safe”, so they earn higher risk adjusted returns on equity when lending to The Risky, so they lost all interest in lending to The Risky.

In this respect the de facto cost of trying to make banks safer has therefore been reducing the opportunities to bank credit of those perceived as riskier, which of course increases inequalities.

Sir, please try to find any bank crisis that resulted from excessive exposures to The Risky. These always resulted from excessive exposures to what was ex ante perceived as belonging to The Safe.

@PerKurowski

Risk weighted capital requirements for banks expresses a venomous lack of confidence in the future

Sir, Martin Wolf writes “the financial crises that destroyed globalisation in the 1930s and damaged it after 2008 led to poverty, insecurity and anger. Such feelings are not conducive to the trust necessary for a healthy democracy. At the very least, democracy requires confidence that winners will not use their temporary power to destroy the losers. If trust disappears, politics becomes poisonous” “Capitalism and democracy are the odd couple” September 20.

No! Free flowing not encumbered by crony statism capitalism is about as democratic it can be.

But one of the pillars of current bank regulations is that when banks lend to or invest in something perceived as safe they are allowed to leverage more their equity than if that is done with something perceived as more risky. That means banks can obtain much higher risk adjusted returns on equity financing the safer present than financing the riskier future.

The 2008 crisis resulted from too much exposure against too little capital to “safe” AAA rated securities, or to sovereigns decreed safe, like Greece.

The minimal response of the real economy to all stimuli, like QEs, is in much the result of “risky” SMEs and entrepreneurs not having a competitive access to bank credit.

To top it up a zero risk-weight of governments with one of 100% of citizens has nothing to do with democracy and all to do with statism brought in through backdoors.

“Democracy says all citizens have a voice; capitalism gives the rich by far the loudest.” Indeed but self appointed besserwisser regulators gave “the safe” more voice than “the risky.”

Wolf’s article ends with “After the crisis, hostility to free-flowing global finance is strong on both right and left”.

Mr. Wolf, that hostility was preceded, and caused, by that insane regulatory hostility against free-flowing bank credit, about which you have decided to keep mum on.

@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

Bank regulators need Business Education… perhaps Finance professors too… if not, they sure need History Education

Sir I refer to your special magazine “FT: Business Education”, September 11, 2017.

If you were a banker, of that type that until 1988 (Basel I) existed for about 600 years, you would, in order to obtain the highest risk adjusted return on equity, and while keeping a close eye on your whole portfolio, lend money to whoever offered you the highest risk adjusted interest rate… of course as long as all your other costs were covered.

If for instance you had to hold 10% capital, perhaps so that your depositors or regulators felt safe, then your expected return of equity would be the average of those net risk adjusted interest rates times 10 (100%/10%)… this before taxes of course.

If an SME or an entrepreneur offered the bank a perceived risk adjusted net margin of 1.25% while an AAA rated only offered 0.75%, the banker would in that case naturally prefer giving the riskier borrower the loan... though probably it would be a much smaller loan.

Sir, do you agree with that? No? Why?

Because when bank regulators introduced risk adjusted equity requirements, they completely changed banking. Since then the risk adjusted net margins borrowers offered, have to be multiplied, by the times these margins can be leveraged on equity.

For instance Basel II, 2004, with a basic 8% bank capital requirement, assigned a risk weight of 20% to any private sector exposure rated AAA, which meant banks needed to hold 1.6% (8%*20%) against these exposures, which meant they could leverage equity 62.5 times (100%/1.6%).

That same Basel II assigned to for instance an unrated SME or entrepreneur, a risk weight of 100%, meaning a capital requirement of 8%, meaning banks could leverage only 12.5 times their equity with this type of loans.

So now what happened? The AAA’s 0.75% net risk adjusted margin offer would become almost a 47% expected risk adjusted return on equity, while the riskier’s 1.25% would only represent about a 16% expected risk adjusted return on equity. Therefore the bank would now by much prefer the AAA rated… Bye-bye SMEs and entrepreneurs.

To earn the highest perceived risk adjusted ROE on the safest, must clearly be a wet dream come true for most bankers; well topped up by the fact that requiring so little capital from their shareholders when lending to the “safe”, left much more profits over for their bonuses.

Did not regulators know their risk weighted capital requirements would distort in this way the allocation of bank credit to the real economy? Seemingly not and that is why I suggest they should go and get some basic business education… after the professors who did not see this have also gone back to the most basic basics.

That because, if regulators did know about the distortion they would cause, then they have no idea of history… or worse, they are financial terrorists. That because no major bank crisis have never ever resulted from excessive exposures to what is ex ante perceived as risky; these have always, no exceptions, resulted from excessive exposures to what was ex ante perceived, and never ever from what was ex ante perceived as risky.

Sir, come to think of it you and most of your collaborators, perhaps all, should also go back to a business education 101.

@PerKurowski

Basel Committees’ risk weighted capital requirements for banks attempts against all dreamers’ dreams of opportunities

Sir, Xavier Rolet rightly refers to the pro-debt bias that makes it harder for small business to access the capital they need to grow. “Europe’s debt bias chokes small business and job creation” September 8.

But is so much worse than that. When it comes to bank credit there is also the pro-perceived safety bias that hinders the SMEs’ access to bank credit. That “over-leverage in the banking system” Rolet writes of, does absolutely not include loans to “risky” SMEs and entrepreneurs, those” best positioned to drive economic growth and create new jobs”

Basel II allowed banks to multiply their capital 62.5 times with the net risk adjusted margins obtained from the AAA rated but only 12.5 times if that same margin was obtained from unrated SMEs. Anyone who cannot understand how that must distort, has never left his desk and walked down Main Street.

And on the same page appears Gillian Tett’s “Treasury bill jitters lay bare investor angst”. Even when it relates to “the curse of living in an Alice-in-Wonderland world, a place where it is increasingly hard to price risk and uncertainty because the normal rules are being torn up”, it does not refer to that abnormal rule of bank regulators considering, ever since Basel I of 1988, the (friendly and good) sovereigns to be worthy of a zero risk weight. That weight usually defended with the argument that sovereigns can always repay since they print their own money… blithely ignoring the Weimar Republics, Zimbabwes, Venezuelas and many other experiences.

And does not a below zero interest rate on some public debt by sheer definition state that it cannot be zero risk weighted? Or will the fact that some are willing to lose in order to hold it suggest a minus 20% risk weight? What a loony world!

To allow a bank to leverage more with a sovereign than with an SME signifies, de facto, from the perspective of how the allocation of credit is distorted, believing in that government bureaucrats are more capable to use credit they are not personally liable for, than those entrepreneurs who put themselves on the line. Sir, you’ve got to be a full-fledged fool or a runaway statist to believe nonsense like that.

In November 2004 FT published a letter in which I wrote: “We also wonder 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… access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

Sir, I am all for “dreamers” being allowed to remain in America, but I must remind you that, all around the world, there are many dreaming of an opportunity to access a bank credit in order to realize their dreams… and those dreams have been made unrealizable, thanks to inept regulators… and you Sir are shamefully keeping mum on this.

@PerKurowski

Crony capitalism, which is really crony statism, includes many crony relations with central banks and bank regulators

Sir, Mohamed El-Erian writes about Jackson Hole meetings 2017: “The symposium left open questions for markets that, given very profitable adaptive expectations, are conditioned to rely on central banks to boost asset prices, repress financial volatility and influence asset class correlations in a way that rewards investors and traders more.” “Yellen and Draghi had good reason for Jackson Hole reticence” August 29.

So instead of relying on the real economy, Mohamed El-Erian, and I presume all his colleagues operating in the financial markets, rely more on what central banks do.

That is so sad, especially since the risk weighted capital requirements for banks, hinders all central bank stimuli to flow where it should. We now have buyback of shares, dividends financed with low interest rate loans, house prices going up, but SMEs and entrepreneurs not getting their credit needs satisfied because the regulators feel these are "Oh so risky!"

El-Erian reports: “Janet Yellen, chair of the US Federal Reserve, and Mario Draghi, president of the European Central Bank — [told] politicians about the importance of financial regulation”

That only happens because politicians have not dared to ask regulators questions like:

Who authorized you to distort the allocation of bank credit in favor of those perceived, decreed and concocted, as “safe”, like sovereigns and AAArisktocracy, and away from the “risky”, like SMEs and entrepreneurs?

Where did you find evidence that those perceived as risky ever caused major bank crisis? As history tells us, these were always, no exceptions, caused by unexpected events, like those ex ante perceived as very safe turning up, ex post, as very risky. 

PS. Do bankers love these crony relations? You bet! Being able to earn the highest expected risk adjusted returns on equity on what is perceived as very safe, must be a wet dream come true for most of them. And besides, by requiring so little capital, and therefore having to serve much less any shareholders’ aspirations, there is much more room for their outlandish bonuses

@PerKurowski

Hallmark; please launch an entrepreneurship channel where all, not just two, live ever after happy because of the successes

Sir, as one who has quite often tried on entrepreneurship adventures and not too often been successful at it, I cannot but say hear, hear to Janan Ganesh’s “Why must entrepreneurs get such a bad rap?” August 26.

The truth is that, except perhaps from some special inventions, nothing produces so much economic benefits we can all enjoy than what the successful entrepreneurs do.

And that is why I am so obsessed against those risk weighted capital requirements sissy regulators have imposed and that force banks to hold more capital against loans to SMEs and entrepreneurs, than they have to hold against the safe AAA rated, as the former had it not tough enough to access bank credit.

Ganesh writes: “The entertainment industry of the world’s most avowedly entrepreneurial nation tends to depict business only to pathologise it.” That’s absolutely right, and that’s why the title of my letter. 

Come on Hallmark, you who have been so good at those chick-flicks that keep my girls fascinated hour after hour; please step up to the plate. Not only we guys are in need of some of the real-tough-it-out flicks.

@PerKurowski

It is in our best interest to keep Yellen, Draghi and other failed regulators out of tackling financial instability

Sir, I refer to Sam Fleming’s and Claire Jones “Yellen to tackle financial stability at Jackson Hole” August 24. Is the title a Freudian slip? Does “tackle” not refer to a problem, such as financial instability?

I argue that since Yellen, as part of that bank regulatory brotherhood that with risk weighted capital requirements for banks helped to cause financial instability, is simply not capable enough to help out achieving financial stability.

The idea of requiring banks to hold less capital (equity) against what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential houses, than against what is perceived as risky, like SMEs and entrepreneurs, is absolutely cuckoo.

That means that when banks try to maximize their risk adjusted return on equity they can multiply (leverage) many times more the perceived net risk adjusted margins received from “the safe” than those from “the risky”. As a result clearly, sooner or later, the safe are going to get too much bank credit (causing financial instability) and the risky have, immediately, less access to it (causing a weakening of the real economy). 

Anyone who can as regulators did in Basel II, assign a 20% risk weight to what is AAA rated and to which therefore dangerously excessive exposures could be created, and 150% to what is made so innocuous to our banking systems by being rated below BB-, always reminds me of those in Monsters, Inc. who run scared of the children. I wish they stopped finding energy in the screams of SMEs and start using instead the laughters of these.

The report also includes a picture of some activists holding a “We need a people’s Fed”. Yes, we sure do! Assigning 0% risk weight to the sovereign and 100% to any unrated citizen is pure statist ideology driven discrimination in favor of government bureaucrats and against the people. But perhaps the activists depicted are not into that kind of arguments. 

Draghi and Yellen might discuss problems associated to ECB’s and Fed’s large exposures to sovereign that their QEs have caused. If they were honest about the size of the problem, they should in the same breath include all sovereign debts and excess reserves held by banks only because of a 0% risk weight. Sir, if that’s not financial instability in the making what is?

PS. Those in Monsters Inc. all finally figured it out. Our bank regulators in the Basel Committee and the Financial Stability Board have yet to do so, even 10 years after that crisis produced mostly by AAA rated securities backed by mortgages to the US subprime sector. and loans to sovereigns like Greece 😩

 

@PerKurowski

Will Jackson Hole Conference 2017 also ignore the distortions produced by the risk-weighted bank capital requirements?

Sir, Michael O’Sullivan, when speculating on Paul Volcker’s presence during this year’s Jackson Hole conference, writes that: “he might well look askance at the actions of contemporary central bankers. Volcker was an inflation crusher, a rate-riser (to 20 per cent) and, we can suspect, someone who believed that investors and economies had to bear the consequences of their choices”, “Jackson Hole offers central banks a chance to hand over baton” August 22.

Indeed but we should not forget that the Fed’s Paul Volcker, teaming up with the Bank of England, was the one who promoted the risk weighted capital requirements for banks… those who have, and still are, horrendously distorting the allocation of bank credit to the real economy.

Basel I, with its 0% risk weight, allowed banks looking to maximize returns on equity, to leverage infinitely the net risk adjusted margins, when paid by a friendly sovereign.

Basel II, for whenever an AAA to AA rating was present in the private sector, authorized a mindboggling 62.5 times leverage.

Basel I and II assigned a risk weight of 100% to risky SMEs and entrepreneurs’ allowing these borrowers’ net risk adjusted margins to be leveraged just 12.5 times.

So banks are going overboard lending and investing in what is perceived, decreed or concocted as safe, the present; while abandoning financing “the risky”, the future.

And all this because silly risk adverse regulators just can’t get their hands on the difference between ex ante and ex post risks. When you argue with them that what is perceived as very risky becomes by that fact alone safe, and that what is perceived as safe becomes risky, their eyes go blank… and they ignore you.

Bankers who are having their wet dreams of earning the highest ROEs on what is “safe”, with so little shareholder capital that it leaves much over for their bonuses, also keep an interested mum on this.

Sir, the immense stimulus offered by central banks has been wasted because the can was kicked down the wrong roads of increasing asset prices and government debts, and not down the road of those who can best help us to a better future.

Risk taking is the oxygen of development. God make us daring!

In the name of my constituency, my grandchildren, I can only say, “Damn those bank regulators”

@PerKurowski

Tim Harford do not compare hurricane Katrina to our 2007/08-bank crisis. The first was nature the second was manmade

Sir, Tim Harford with respect to the global financial crisis, and referring to the fact that Hurricane Ivan of 2004 should have better prepared New Orleans for Katrina in 2005 asks: “even if we had clearly seen the crisis coming, would it have made a difference?” “Mental bias leaves us unprepared for disaster” August 19.

That is indeed a question, but a more precise one would be: “If we had clearly understood why a crisis had to come, would it have made a difference?”

Here is my simplified version of that issue.

Suppose a SME offered to pay the bank 6.5% in interest rate, which the bank saw as 2% for it’s cost of funds, 3% for the risk of the SME and 1.5% in net risk adjusted margin. Suppose also an AAA rated offering to pay 3.5% in interests, which the bank sees again as 2% for it’s cost of funds, 0.5% in risk premium and so therefore yielding a resulting risk adjusting net margin of 1%.

In all those more than 600 years of banking before the risk weighted capital requirements were introduced, bankers would lend to whom offered the largest risk adjusted net margin perceived, in the previous case to the SME.

But, after Basel II banks could leverage the SME’s offer 12.5 times, which would produce the bank an expected ROE of 18.75%, while the AAA rated could be leveraged 62.5 times, yielding an expected ROE of 62.5%.

Then of course the banks would naturally have to lend to the AAA rated, as not doing so would actually be ignoring their fiduciary responsibility to their shareholders.

So here is the real question. If that distortion in the allocation of bank credit had been duly understood, would it have made a difference? My answer would be a qualified “Yes!” That because, as a minimum minimorum, regulators would have understood that since their capital requirements were (loony) portfolio invariant, they would have to be especially careful with excessive growth of “safe” investments... like those AAA rated securities. 

Harford writes: “10 years on, senior Federal Reserve official Stanley Fischer is having to warn against ‘extremely dangerous and extremely short-sighted’ efforts to dismantle financial regulations.”

Sir, I warn instead against not dismantling entirely those financial regulations that caused the crisis… and that now keep sending all QE and low interest stimuli down unproductive roads.

PS. And not to speak about the 0% risk weighing of sovereigns, that which caused the excessive bank exposures to for instance Greece.

PS. One day Stanley Fischer, like most current central bankers and regulators will ask himself, why did I not see that?

@PerKurowski