Has Brexit and Trump just been too much for Martin Wolf to handle?

Sir, on December 30, 2009 Martin Wolf wrote: “the civilisation we pray survives for our descendants is indeed at stake”, "The challenges of managing our post-crisis world", December 30.

As a father, then not yet even a grandfather, I shared entirely that concern: "The monsters that thrive on hardships haunt my dreams"

But now it would seem that Wolf has given up all hope, as when he seemingly in panic writes: “As a species, our power is now too great to afford today’s essentially uncontrollable competition among myopic states. I do not expect us to achieve a world government. But that is also why I expect humanity to do unimaginable damage to itself and the planet over the coming centuries”, “What’s the big — and the bad — idea?” September 16.

And to avoid those “unimaginable damages to” humans, Wolf would now “like to see a world government. It would be a confederation, with a governing council, no president. Maybe three consuls.”

What on earth as gone into Wolf’s mind, what would that guarantee us?

In April 2003, when as an Executive Director of the World Bank I commented on the World Bank's Strategic Framework 04-06, I opined: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

So Sir, for me to substitute with some three besserwisser the wisdom of all us individual humans, is sort of the last thought that enters my mind.

On the contrary, what we must do is to increase the changes for the most insignificant of citizens, like me, to question the wisdom of any self or network appointed consuls of the world.

For instance Wolf could do much good by helping me ask bank regulators why on earth they decided to assign a risk weight of only 20% to what is AAA rated and which therefore could provoke the creation of dangerously high bank exposures; while giving the below BB- rated, those so innocuous because bankers won’t touch them with a ten feet pole, a whopping risk weight of 150%.

Sir, I do feel sorry for Martin Wolf, I suspect Brexit and Trump has been too much for him, it has short-circuited his great mind.

@PerKurowski

The financial packaging / securitization process includes an evil incentive

Sir, Patrick Jenkins in the Spectrum special “Financial crisis: 10 years on: Where are we now?” September 1 writes: “So great was investors’ appetite for these high-yielding MBSs and CDOs that mortgage companies lowered their underwriting standards to feed the securitisation sausage machine.”

Yes and no! First these MBSs had the additional quality of being rated by the credit rating agencies as very safe, AAA in many cases; and so in fact offered extremely high risk-adjusted yields, which made their great attractiveness perfectly logical. Naturally many investors would fall for these.

But then we have the problem with the securitization process itself. If you package something safe and sell it of as something safer, the profits are much smaller than if you manage to package something very risky and are able to sell it off as safe. So “mortgage companies lowered their underwriting standards”, not only because of the demand, but also because that allowed the original mortgages to carry higher interest rates, and so the profits of the packaging team would be larger larger. Here is how I have described that on my blog for more than a decade.

“If you convinced risky and broke Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Fred that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell Fred the mortgage for $510.000. This would allow you and your partners in the set-up, to pocket a tidy profit of $210.000”

@PerKurowski