Sir, is it not high time FT abandons its “Après nous le deluge" mode?

Sir, of the letters I wrote and which you published, before I was censored for the given reason that I wrote too many letters, that which gets the most attention in my blog is the one titled “Long-term benefits of a hard landing”.

In that letter I argued Why not try to go for a big immediate adjustment and get it over with? … 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.”

How sad it is that almost eight years later, after having basically wasted QE’s, Paul Serfaty still finds a valid reason to end his letter with “Bite the bullet. Reprice the assets. Write off the unpayable debt. Smite the unwary. Start again with a new confidence that there is an upside”, “QE monster has regulators and markets alike transfixed” January 22.

Sir, look back at what your columnists have written over the last eight years, and you will find that most of it has to do with kicking the can down the road, by means of QEs, fiscal deficits and much other… all having us climb ever higher, that mountain of excessive liquidity, unsafe excessive price of “safe assets” and excessive sovereign debt, from which we must come down from, sooner or later.

Frankly Sir, is it not high time FT abandons its “Après nous le deluge” mode?

“Regression to the mean”, if allowed by politicians and regulators, will take care of the plutocrats, in due time.

Sir, Paul Marshall in “Blame the rise of the plutocrats on politics not capitalism”, January 9, holds that we need Schumpeter much more than Marx.

As you could deduct from my letter “Long-term benefits of hard landing” and which you kindly published, before you decided to name me a persona non-grata at FT, I totally agree with him

I have never been too much concerned by the rise of plutocrats, since I have always figured that, mostly, it was the result of something good… and I have always counted on the “regression toward the mean” theory, aka “reversion to the mean”, or aka “reversion to mediocrity”, to take care of the problem of the same plutocrats reigning into eternity.

But for that “regression to the mean” to happen, anyone that has that in him to be a plutocrat needs to be able to become a plutocrat… and that requires not only fair access to education as Marshall rightly puts forward, but almost foremost fair access to bank credit. And credit-risk weighted capital requirements for banks which operate in favor of those who have made it; and against those risky who have yet not made it, and who probably most of them will fail while trying to make it; blocks that fair access to bank credit.

And then of course, for the “regression to the mean” to happen, losses need to flow freely, and not be contained by QE dams, which quite often help to make the plutocrats even more plutocrats.

PS. There are some other issues related to the rise of plutocrats that need to be more closely looked into. One is intellectual property right. Why should income from a shielded property right be taxed at the same rate than those profits coming from competing bare-naked in the market?

Nothing ‘creative’ about destruction of lending to start-ups

Published in FT, December 14, 2011

Sir, Ed Crooks writes that start-up businesses are crucial for creating US jobs but their dwindling birth rate is stalling hopes of recovery "Cycle of 'creative destruction' loses momentum to start-ups", Is America working? December 13).

Lending to start-ups, as something perceived as “risky” for the banks, even though its absence would of course be much riskier for the world at large, requires a lot of that bank capital that is so scarce now; especially after the regulators allowed the banks to lend to what was perceived as not-risky, with little or no capital at all.

In Schumpeterian terms, one can say that bank regulators are engaged in simple and plain vanilla destruction.

Do not undercut in any way the disciplinarian role of the market

Sir as an Executive Director at the World Bank 2002-2004 and as member of its Audit Committee I remember as one of my biggest frustrations continuously warning about counterparty risks and always ending up being answered along the lines of... “What counterparty risks? Don’t you know that a triple-A is a triple-A is a triple-A?”

This is why I take strong exception when Matthew Richardson and Nouriel Roubini in “Insolvent banks should feel market discipline”, May 7, though correctly advocating more of Schumpeterian creative destruction, are surprisingly lenient in the case of counterparty risk. They even write “But unlike with Lehman, the government can stand behind any counterparty transaction”. No!

What is counterparty risk? The risk that for example the insurance company you have insured yourself with cannot pay up when it should. This risk is clearly not a risk that an ordinary citizen should have to bear but for the financial system’s overall health it is an absolute must that all the qualified institutional participants bear with the full consequences of it.

In fact, in case they have not read it, current third pillar of the otherwise so discredited bank regulations from Basel – named the market discipline, “aims to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on the scope of application, capital, risk exposures, risk assessment processes, and hence the capital adequacy of the institution.” And that of course means the evaluation and the taking of counterparty risks.

And by the way, just as the markets would benefit from more creative destruction, let me also remind you that so would our financial regulators