When being rightly suspicious about making algorithms powerful let us not ignore that powerful humans could be very dangerous too.

Sir, Tim Harford, agreeing with Hayek holds “Market forces remain a more powerful computer than anything made of silicon.” “Algorithms of the world, do not unite!” December 2.

But when regulators decided to replace the risk assessments of thousands of individual and diverse bankers, with those produced by some few human fallible credit rating agencies; and then allowed banks to increase their bets on these ratings being correct, for instance with Basel II allowing banks to leverage a mindboggling 62.5 times if only an AAA or an AA rating was present, we would have benefitted immensely from having some algorithms indicate them this was pure folly.

Because, in the development of such algorithms, it would not been acceptable to look solely at the risks of bank assets as such, but would have required to consider the risk those assets posed for the banks.

And as a result the algorithms would not have allowed banks to leverage more with safe assets than with risky, that because only assets perceived as very safe can lead to the build up of such excessive exposures that they could endanger the whole bank system, were the credit ratings to turn out wrong.

“An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” expresses: “The model [is] portfolio invariant and so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.”

And the explicit reason given for that inexplicable simplification was: “Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

Sir, algorithms are precisely designed to combat such complexities.

Yes, “Facebook and Google have too much power” but so did the regulators; and with their risk weighting of the sovereign with 0% and citizens with 100%, Stalin would have been very proud of them.

@PerKurowski

The 0% risk weighting of sovereigns is a very subtle version of brutal top-down Stalinism. It will not work either

Sir, Sergei Guriev, the chief economist of European Bank for Reconstruction and Development concludes in that “The Great Soviet Experiment demonstrated the deficiencies and unsustainability of the non-market model” “The Russian Revolution offers economic lessons”

But there, right in front of his eyes, he has bank regulations that with Basel I of 1988 decided, with respect to the risk weighted capital requirements for banks, that the risk weight of a sovereign is 0% and that of the citizens is 100%.

As a consequence banks can leverage their equity more, and therefore obtain much higher expected risk adjusted returns on equity when lending to the sovereign than when lending to the citizen. And therefore banks will lend much more to the sovereign than they would otherwise have done.

Sir, is that just not a much more subtle version of the brutal top-down Stalinism that Guriev writes about? Of course it is! And because it is de facto premised on that government bureaucrats will be able to use bank credit for which they are not personally responsible for better than the citizens, it will not work either.

Unfortunately, it would seem like that the Financial Times wants that statism to remain invisibly subtle.

@PerKurowski

You have to root out the monsters in their homeland first

Sir Stefan Wagstyl should perhaps have expanded the title “Stalin still looms large over eastern Europe” with the “because he still looms large over Russia” August 31. Wagstyl rightly points us to see that the way countries victimized by foreign monsters can overcome such events starts with how the monsters´ homelands overcome being just that. Since Germany has done so much more in accepting the horrendous realities of a Hitler, than Russia those of Stalin, Germany has been more able to overcome its own demons and shames, and, consequentially the world has been much more able not to hold it against it. Besides, these monster´s, if not pulled out completely, with all their roots, can rot and infect and propagate.