#AI ChatGPT - OpenAI: A question on behalf of FT and Martin Wolf.

 In "Britain needs a growth strategy" Martin Wolf mentions the UK has for too long settled for managing stagnation.

On behalf of FT and Martin Wolf I decided to ask ChatGPT:

"Could bank capital requirements that favors “safe” government debt and residential mortgages over “risky” loans to small businesses and entrepreneurs, doom a nation to stagnation?"

ChatGPT answered:

"The impact of bank capital requirements on economic growth is a complex and debated topic among economists. Capital requirements are regulations set by financial authorities that determine the amount of capital a bank must hold in relation to its assets. These requirements are designed to ensure the stability of the financial system by reducing the risk of bank failures.

If capital requirements heavily favor "safe" assets such as government debt and residential mortgages over "risky" loans to small businesses and entrepreneurs, it can potentially have both positive and negative effects on the economy.

Potential Positive Effects:

Financial Stability: By incentivizing banks to invest in safer assets, capital requirements can contribute to financial stability. This reduces the likelihood of bank failures, which could have broader systemic consequences.

Investor Confidence: Investors and depositors may feel more secure knowing that banks are holding assets that are considered safer, leading to increased confidence in the financial system.

Potential Negative Effects:

Stifling Innovation and Growth: If banks are discouraged from lending to small businesses and entrepreneurs, it could hinder innovation and economic growth. Small and medium-sized enterprises (SMEs) are often drivers of job creation and economic dynamism.

Inequality: Focusing on "safe" assets may exacerbate economic inequality. Small businesses, startups, and entrepreneurs, which are crucial for innovation and job creation, might face difficulty accessing the necessary funding.

Reduced Economic Diversity: A banking system overly concentrated on certain types of assets may lead to reduced economic diversity. This can make the economy more vulnerable to shocks in specific sectors.

Long-Term Stagnation: Overemphasis on "safe" assets might lead to a lack of risk-taking and investment in new ventures, potentially resulting in long-term economic stagnation.

Balancing Act:

It's crucial for financial regulators to strike a balance between stability and promoting economic growth. Prudent capital requirements that consider the riskiness of assets, while still allowing banks to support economic development, can be important. Striking the right balance often involves ongoing adjustments to regulations based on economic conditions and lessons learned from past experiences.

In conclusion, while capital requirements that favor "safe" assets can contribute to financial stability, an excessive focus on them at the expense of riskier but potentially innovative investments could indeed have negative consequences for a nation's economic dynamism and growth. The challenge lies in finding a regulatory framework that mitigates risk without stifling entrepreneurial activity and economic progress."

Thanks!

ChatGPT answered: You're welcome! If you have any more questions or if there's anything else I can help you with, feel free to ask. Happy to assist!

Note: The answers are copied exactly from those given to me by OpenAI

Here my many other questions to ChatGPT – OpenAI on bank regulations

Comment: Way back, 2009, Martin Wolf was kind to publish in his Economic Forum an articled I titled "Please free us from imprudent risk aversion and give us some prudent risk-taking." I stand by it more than ever.

Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.

Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.Sir, Martin Wolf writes: “we are missing a profound transformation in how macroeconomic stabilisation will have to be conducted. Whether we like it or not, we must rely on active fiscal policy.” “Restoring growth is more urgent than cutting public debt” December 14.

Of course, we need active fiscal policy, but what about the private sector? E.g. we must be able to rely on effective allocation of bank credit. And that, because of the risk weighted bank capital requirements, is simply not happening. Two examples: 

Much lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats/politicians know better what to do with credit they are not personally responsible for than e.g. entrepreneurs. And unless we are communist, or in love with taking decisions with other people’s money, we know that’s not true.

Banks are also allowed to leverage their equity much more with residential mortgages than with loans to small businesses/entrepreneurs, those who create the jobs that helps service mortgages and pay utilities. That favors the increase of house prices and weakens the economy. Insane!

Wolf argues: “It is essential to lock in low interest rates. The maturity of UK public debt has always been relatively long. The aim now should be to make it as long as possible, by taking advantage of exceptional borrowing conditions.”

But, those “exceptional borrowing conditions” are artificial. What would the free market rate on UK public debt in absence of QEs and the low bank capital requirements mentioned? And is not the difference between that rate and current ultra-low interests, de facto, not a well camouflaged tax, retained before the holders of those debts could earn it?

We all, Martin Wolf included, should be able to have confidence in that our banks are regulated by sensible and competent people. For a starter that requires regulators understanding that those excessive exposures that could be dangerous to our bank systems, are always built up with assets perceived as safe, never ever with assets perceived as risky.

Sir, July 12 2012, Wolf wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." 

Seemingly he still does not ​really ​understand what I meant.

My 2019 letter to the Financial Stability Board

@PerKurowski

FT, I have two questions and one observation to make about the securitisation and privatisation of student debt in UK.

Sir, Thomas Hale writes that after “the biggest privatisation of student loans…the first of a series of anticipated transactions that stand to create a market for graduate debt in the UK, the parliament’s spending watchdog concluded the government received too little in return for what it gave up”. “Spending watchdog criticises student loans privatisation” November 22.

The Department for Education, DfE, answered it was “confident that we achieved value for money for taxpayers… as Student loans are designed so that borrowers only repay when they can afford to [which] only means many students will never fully pay back their loans”

I have two questions and one observation to make

First question: Before a student has his debt packaged into a security to be sold off to investors, should he not have the right to make a preemptive offer for it? Not that it makes a real difference but, emotionally it might not be the same for some to owe their government than to owe Goldman Sachs  their student debt.

Second question: If taxpayer should receive value for money for all these student loans, should not those who are supposed to help students to repay their debts, the professors, the universities also have some skin in the game? I mean at this moment it would seem they get all the benefits from the students taking on debt, at no cost or risk for them.

I recently tweeted: Have you ever seen a university stating a normal investment disclosure like: “Warning, if you pay us for your studies by taking on debt, you might not earn enough to repay it.” 

Hale writes: “Securitisation, a process where assets are packaged together and sold on as bonds to investors, ranging from pension funds to alternative asset managers”

It is with respect to that I would like to make an observation, namely that of reminding that securitization is basically like making sausages, the worse the ingredients, the higher the profits. So pension funds, please beware!

@PerKurowski

The dangers of the unknown unknowns are greater than those of the known unknowns.

Sir, Martin Wolf asks, “Is it possible to know the state of the UK public finances under present conditions?” He answers “No. The unknowns are too great.” “Some ‘known unknowns’ about the UK economy”, October 19.

Indeed, but to me, the most dangerous unknowns for the UK, and for much of the rest of the world, are the “unknown” unknowns. 

Like how much of the savings for the future, of those who are the least able to manage major upheavals, has been invested in houses; those homes that because of so much preferential finance increased their prices so much, that they were turned into also being risky investment assets?

Houses are good investments… until too many want to convert them simultaneously into main-street purchasing capacity.

Like how much of the illusion of public debt sustainability is solely the result of preferential regulations, like the Basel Accord of 1988 decreeing a 0% risk weight to sovereigns and a 100% risk weight to citizens?

Any sector given more preferential access to credit than other is doomed to unsustainable debt… just like Greece was doomed by the 0% risk weight some yet unknown EU authorities awarded it.

Sir, when compared to these in general unknown unknowns, the known unknowns, like Brexit or trade wars, are just peanuts. 

@PerKurowski

We need to rethink productivity data, in light of so many “working hours” spent consuming distractions.

Sir, referencing Chris Giles’ and Gavin Jackson’s “Surge in low-value jobs magnifies UK productivity problem” of August 13, I believe that whenstating “increases in low-wage jobs in bars, social work and warehouses have served to hold back UK productivity growth” it hints at sort of causation that might not really be there.

I say so because we have entered a new era that requires redefining entirely the ways we measure productivity. 

Some months ago, in Bank of England’s “bankunderground” blog, we read a post by Dan Nixon titled “Is the economy suffering from the crisis of attention?”. It said, “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

Nixon, answering the question posed in the title wrote, “The most obvious place to look would be in productivity growth, which has been persistently weak across advanced economies over the past decade.”

But, what if instead of being recorded as distractions during working hours, these were to be recorded as a private consumption that reduces the effective working hours? Would that not increase GDP and reduce working hours, and thereby point instead to a dramatic increase in productivity?

In the same vein, would then not real-salaries, instead of stagnating, have been increasing a lot?

And what about our employment and unemployment data if the time used to consume distractions during working hours would not be counted as work? 

Sir, it behooves us to make certain how we measure the economy gets updated to reflect underlying realities. 

Perhaps then we are able to understand better the growing need for worthy and decent unemployments.

Perhaps then we are able to better understand the need for a Universal Basic Income, not as to allow some to stay in bed, but to allow everyone a better opportunity to reach up to whatever gainful employments might be left, like those “low-wage jobs” that it behooves us all, not to consider as “low value jobs”

@PerKurowski

If you allow banks to earn higher risk adjusted returns on equity on mortgage lending than when lending to entrepreneurs, bad things will sure ensue

Sir, Jonathan Eley writes: “in the UK…younger people especially are being priced out of the market while their parents and grandparents benefit from decades of above-inflation rises in home values. The ruling Conservatives, traditionally the party of home ownership, now finds itself shunned by millennial voters frustrated by spiralling housing costs” “Why Budget fix will not repair market” November 21.

And among the long list of factors that has distorted the market in favor of houses Eley includes: “Mortgage securitisation facilitated further growth, as did the Basel II reforms cutting the risk weights applied to real estate. This made mortgage lending less capital-intensive for banks.”

This Sir is one of the very few recognitions, by FT journalists, of the fact that risk weighting the capital requirements for banks distorts the allocation of bank credit.

Indeed, Basel I in 1988 assigned a risk weight of 50% to loans fully secured by mortgage on residential property that is rented or is (or is intended to be) occupied by the borrower, and Basel II reduced that to 35%. Both Basel I and II assigned a risk weight of 100% to loans to unrated SMEs or entrepreneurs.

But the real bottom line significance of “mortgage lending [being] less capital-intensive for banks”, is that banks when being allowed to leverage more with mortgages than with loans to SMEs and entrepreneurs, earn higher expected risk adjusted returns on equity with mortgages than with loans to SMEs and entrepreneurs, and will therefore finance houses much much more than SMEs and entrepreneurs, than what they would have done in the absence of this distortion.

As I have written to you in many occasion before, this “causes banks to finance the basements where the kids can live with their parents, but not the necessary job creation required for the kids to be able to become themselves parents in the future.”

And the day the young will look up from their IPhones, and understand what has happened, they could/should become very angry with those regulators that so brazenly violated that holy intergenerational social bond Edmund Burke wrote about.

I can almost hear many millennials some years down the road telling (yelling) their parents “You go down to the basement, it’s now our turn to live upstairs!”

Eley also quotes Greg Davies, a behavioural economist with: “People like houses as an investment because they are tangible. They feel they understand them far more than funds or shares or bonds.”

But the real measurement of the worth of any investment happens the moment you want to convert it into current purchase capacity. In this respect people should think about to whom they could sell their house in the future, at its current real prices.

PS. In June 2017 you published a letter by Chris Watling that refers exactly to this, “Blame Basel capital rules for the UK’s house price bonanza”.

What most surprises me is that regulators don’t even acknowledge they distort, much less discuss it… and that the Financial Times refuses to call the regulators out on this… especially since all that distortion is for no stability purpose at all, much the contrary.

It is clear that no matter its motto of “Without fear and without favor”, FT does not have what it takes to for instance ask Mark Carney of BoE and FSB, to explain the reasoning behind Basel II’s meager risk weight of only 20% to the so dangerous AAA rated and its whopping 150% to the so innocous below BB- rated.

@PerKurowski

So much needed is currently not even on politicians’ menus.

Sir, Tim Harford, desperately writes: “It is curious that the Labour party that frets so much about taxing the rich is so careless about reaching the poor… Tory policy on Brexit is nothing more than a string of Orwellian catchphrases: “strong and stable”, “smooth and orderly”, “deep and special”. Freedom is slavery; ignorance is strength… For this disheartened voter, ignorance would be bliss.” “The menu of politicians and policies is inedible” May 3.

I am not a UK voter but, if one, I would also be tempted to reach out to some form of motivated ignorance. But that said, if there is something that really drives me mad (besides the so stupid risk weighting of bank capital requirements), in the UK and everywhere, is the little interest given to prepare for the structural unemployment that is advancing day by day.

For instance, a Universal Basic Income could be useful to help guarantee social cohesion when unemployment rates go over certain limits, but it might do little to help mend any social cohesion that has already been lost.

In Labour or Tory party, who is working for the decent and worthy unemployments that will be, or are already needed?

@PerKurowski

No Martin Wolf! You do not get good results, for all, with Brexit negotiations, arguing that the UK holds a weak hand.

Sir, Martin Wolf, with respect to Brexit negotiations writes: “Theresa May should have realised, above all, that she holds a weak hand: the costs of no deal would be far bigger for the UK than the EU.” “Britain has the chance to secure a smooth Brexit transition” May 5.

What? Weak hand? EU has more to lose from Brexit than UK. EU gets stuck with the Euro, and so many other unresolved differences, languages included, without having Britain as a calming unofficial arbitrator. How many EU countries does Wolf think that will be glad seeing UK leave, and would settle with a high indemnity payment?

That is the only starting point that can lead to a continuous amicable and useful for all Britain and EU relation.

The more all European citizens send that message to those dummkopfs in Brussels who want to play macho men, in order to get back at those who showed so much disdain for them that they wanted to leave, the better for all in Europe.

The local European governments should be especially alert and not allow some few technocrats in Brussels to decide their future relations with Britain. It is they who will pay the costs.

Everyone might be helped by an ad campaign along the lines of: "EU, Brussels’s technocrats share blame for Brexit. If you Europeans want an amiable separation, help keep them in check"

Britain, of course, do not let these arguments I make go to your head either. It’s all a quid pro quo.

@PerKurowski

If regulators keep on regulating as bad as now, will it really help much to ringfence the banks?

Sir, you write: “By the start of 2019, Britain’s largest lenders will need to put their retail banking units inside a heavily capitalised subsidiary, protecting them in case the group fails.”, “Ringfencing will help in the next banking crisis”, January 10.

Do you really think that as long as government/tax-payers are not exposed to having to pay for a bank crisis, then its effects are smaller? If so, why did you not say so before lending support to governments and central banks, on behalf of unwilling or at least un-consulted taxpayers, with Tarp and QEs and similar paying out so much to alleviate the last crisis?

You refer to the Vickers Commission with admiration I do not share. In June 2015, in one of my thousands of ignored letters to you, when commenting on one of Martin Wolf articles I wrote: “The number one priority for any bank regulator, long before thinking about ring-fencing and similar “safety” devices, is to make sure the allocation of bank credit to the real economy is not distorted. To look for banks to be able to survive in shining armor in the midst of the rubbles of a destroyed economy is just insane.”

Sir, I’ve seen very little rectification coming out from bank regulators. Worse yet, the few correct movements they have done in moving towards simpler leverage ratios, because they kept in place some risk-weighting element, have in fact, on the margin, only increased the distortions in the allocation of bank credit to the real economy.

FT, in this matter of Basel’s bank regulations, you are so behind the curve. As is, I am almost tempted to say: “No ringfencing, let the banks run loose, with no supervision!”

@PerKurowski

For UK to re-engineer its growth model, it needs to de-engineer its loony risk adverse bank regulation model

Sir, Alberto Gallo writes: “At the heart of Britain’s problems is its unbalanced growth model, centred on London and financial services, a lack of investment in sectors that boost productivity rather than asset prices, and the resulting inequality… Britain needs a plan to re-engineer its growth model” “UK must rebalance growth model to steer past Brexit iceberg” October 20

That is a very clear definition of the problem. Unfortunately, among the proposed solutions, Gallo leaves out what needs to happen with bank regulations.

In short, for the umpteenth time, the risk weighted capital requirements for banks hinder these from financing the riskier future, having them only refinancing the safer past. The risk weights of 0% the sovereign, 20% the AAArisktocracy, 35% residential housing and 100% unrated SMEs and entrepreneurs shouts out what is wrong… unfortunately too many, FT included, are blind or deaf.

Unless Britain eliminates the distortions in bank regulations that work against productivity it is doomed to like old soldiers to slowly fade away… living up, little by little, all its past economic achievements.

@PerKurowski ©

The UK’s Financial Conduct Authority has got to be kidding, or it is just too dumb. Your choice Sir?

Sir, Caroline Binham writes: “Britain’s financial watchdog is clamping down on investment banks’ “misrepresentation” and league table inflation as part of efforts to stamp out conflicts of interest to ensure clients, particularly small companies, get a fair deal.” “UK regulator clamps down on banks’ moves to manipulate league tables” October 19.

It sounds important and seems correct, but also like a very bad joke. Here is “Britain’s financial watchdog”, one that gladly allows risk weighted capital requirements to be imposed on banks; that which curtails the access to bank credit of small companies, now coming out as a champion for the SMEs. It has got to be kidding, or it has to be dumb. Your choice Sir?

@PerKurowski ©

Could BoE’s bank regulation risk weights for the infallible UK sovereign also have to go negative; from 0% to -20%?

Sir, Martin Wolf writes that “The government will learn about the limits of sovereignty in an open economy” “The markets teach May a harsh lesson” October 12.

What a surprise? I thought that someone like Wolf, who seems to agree with the concept expressed by the Basel Committee of a 0% risk weight for the sovereign, and a 100% risk weight for We the People, would not doubt the powers of the infallible sovereign this way.

Jest aside, an “Open Market” does not currently exist. In such market regulators would not be able to distort the allocation of bank credit as they do.

A very nervous Wolf writes: If “the inflows of capital needed to finance the UK's huge external deficit… ceased… Then the currency might collapse. Yields on gilts might also jump”

Calm! Take it easy Mr Wolf. The neo-independent BoE could then declare that the risk weight for the infallible sovereign of UK should also turn negative, and so be lowered from 0% to minus 20%. See… problem fixed!

To discuss economy, in a world in which bank credit is being so distorted, and so few care about it, makes me sometimes feel as I have fallen down Alice’s Rabbit-Hole. I hope, for my grandchildren’s sake, I wake up to find its all been a nightmare.

@PerKurowski ©

The Banking Standards Board should also require bank regulators to uphold higher ethical standards

Sir, Patrick Jenkins’ discusses what the Banking Standards Board can do influencing the ethics of banks. “Banks gain help on the scandal-strewn road to better behaviour” March 8.

If I were the BSB then, in the case of the fatidical mis-sold mortgage-backed securities, I would come out swinging against the regulators stating:

How on earth did you allow us banks to buy AAA to AA rated securities against only 1.6 percent in capital, meaning we could leverage our bank equity 62.5 times to 1 with that kind of paper? Don’t you know there are very few human bankers able to resist such temptation because, if they did, they would find other banks earning much higher expected risk adjusted returns on equity, leaving them as the dumb kids of the block, or as those who refused to dance while the music was playing?

And now, should those who created the temptations, the devils in the play, be able to go free, while we who fell for the temptations, the weak in flesh, shall bear all guilt? No! That’s not acceptable!

And, if I were accused of the manipulation of Libor, I would at least declare in my defense that such manipulation was really quite harmless when compared to the regulators’ manipulation of the allocation of bank credit to the real economy. That manipulation, which regulators committed with their risk weighted capital requirements for banks, was and is also something completely unethical.

@PerKurowski ©

John Kay: A progressive business tax in UK, based on £ rent per square foot of space?

Sir, I read with much interest John Kay’s “A nation of shopkeepers in need of new ideas on tax” October 14.

Might he have a progressive business tax, based on £ rent per square foot of space, in mind?

In a way that would help to correct for inequalities derived from unequal growth rates around the country.

In a way that would help to correct for instances the inequalities derived from QEs and similar liquidity injections that tend to benefit more some assets than other.

When I studied to obtain a real estate sales and mortgage advisor license in Maryland US, primarily interested into getting to know more about how the subprime disaster had happened, I was surprised to see that the Federal Housing Administration, FHA, would guarantee a one family mortgage in Montgomery County, Maryland for $625,500, while for instance only US$ 271.000 if that home was in Hattiesburg, Mississippi.

Can you imagine if a Eurozone FHA did the same in the case of Berlin and Athens?

That is another example of how authorities, instead of remaining neutral, reinforce market perceptions and valuations.

@PerKurowski ©  J

Lord Adonis, as your National Commissioner, could do more for UK’s infrastructure by going to Brussels and Basel than staying in London.

Sir, I refer to your “A commission for firing up Britain’s bulldozers” October 7.

You write: “In economic terms, more infrastructure ticks every box. It enhances productivity, while building it also creates jobs. With interest rates near to all-time lows, the financing costs are nothing to fear. Should prudence or ideology demand the use of private instead of public money, there are pension funds crying out for a stable return, if the state bears the construction risk.”

Not so fast! In infrastructure, what could and how it will be financed, in the UK, depends a lot on what the financial regulators think; as they express in their capital requirements for banks and insurance companies. These regulators are in so many ways the real Great Disrupters. 

In fact, your Lord Adonis would be well advised to take a little study trip to Brussels and Basel to learn about all this. In fact you’re your Lord Adonis could well be doing UK’s infrastructure sector much more favors staying there, helping to eliminate the distortions to infrastructure finance that regulators create, than what he could achieve by remaining in London leading the National Infrastructure Commission.

Per Kurowski

@PerKurowski ©  J

In relative terms, banks finance too much house buying, and too little the job creation needed to serve the mortgages.

Sir, Kate Allen reports: “Last year the BoE introduced tougher mortgage lending rules and warned that a possible resurgence in the country’s pre-credit crunch house price boom risked derailing Britain’s economic recovery’ “ECB easing raises fears on house price bubble” July 21.

But what BoE is not mentioning or doing a lot about, is the fact that allowing banks to hold less equity financing mortgages, than when financing for instance SMEs, means that banks will perceive they can obtain higher risk-adjusted returns on equity when financing mortgages than when financing SMEs; which means banks will, relatively, finance too much mortgages and too little SMEs… or as I prefer to phrase it… too much house buying and too little jobs with which serve the resulting mortgages… and the utilities.

@PerKurowski

Nial Fergusson, do not blame Keynes, Keynesian economists do not give Keynesian policies a fair chance to work.

Sir, Niall Ferguson holds that Keynesians have lots of egg on their face after the elections in the UK where the conservatives won, by a lot “Labour should blame Keynes for their election defeat” May 11.

Indeed they should have, but the reason for it has little to do with what Ferguson thinks or wants to imply.

No Keynesian policy on earth, could deliver real positive and sustainable results, when bank regulations impede the liquidity their spending policies generate, to reach those who could make the most of it.

In 1988 with the Basel Accord, sort of when everyone was busy attacking the Washington Consensus for its private sector bias, the regulators (for ideological reasons), for purposes of defining the equity banks had to hold against assets, decided that the risk weight of the infallible sovereign was to be zero percent, while the risk weight for lending to the fallible citizen was to be 100%.

With that the regulators privileged government bureaucrats’ access to bank credit over the others in the markets.

Later, in 2006, with Basel II, they “half mended” it, by stating that some AAArisktocrats were good enough to have a risk weight of only 20%.

And so then everyone met happily in Davos, where of course no lowly “risky” SMEs are invited.

And here we are with for instance Paul Krugman preaching us about inequality, but keeping mum on the fact that the risk-weighted equity requirements for banks, by killing the opportunities of the risky to access bank credit in fair terms, is a great inequality driver.

The real problem might be that many of current Keynesians want much more statist governments than Keynes ever considered, and so the zero percent risk weighting of sovereigns, attracts them too much… and so they do not want to even give Keynesianism a fair chance to work.

Of course, the free-market defendants who failed to see how distorted the allocation of bank credit has become; or who do not want to cross banker friends who just adore the concept of being able to leverage immensely what is ex ante perceived as safe, and therefore keep silence on all this, will also end up having egg on their faces. (You too Niall Ferguson?) 

PS. How can you give a zero credit risk weight to a debtor who, right in your face, is pursuing financial repression, inflation (just another kind of haircut)?

@PerKurowski

What keeps the very competent Martin Wolf from commenting on the mother of all regulatory distortions?

Sir, I refer to Martin Wolf’s “Why neither main party is competent” May 7. He sure gives a depressing outlook for the UK. In it he writes about a “disturbingly weak and unbalanced recovery, not a strong, healthy one.”

But, as I have explained to him in hundreds of letters over the last decade, if regulators insist on discriminating against banks lending to those perceived as risky, favoring so much the lending to those perceived as safe, there simply cannot be a strong and balanced recovery. By allowing banks to earn higher risk-adjusted returns on equity on what is perceived as “safe” than on what is perceived as “risky”, that is precisely what their current credit-risk-weighted equity requirements for banks do.

That regulation distorts the allocation of bank credit to the real economy. It caused the crisis, and it stops us from getting out of it. Since risk-taking is the oxygen of all development, and since we got more than enough with our own natural risk aversion, we really cannot afford regulators from layering on theirs.

Wolf seems to begin to reflect on this the mother of all regulatory distortions, like when he states that neither Labour or Tory-led governments “showed healthy scepticism about financial services”; and opines “The time has surely come to shift the focus from the obsession with fiscal deficits and debt. These were neither the cause of the crisis nor the solution.”

But no! Wolf does not get there, and I do not think it is incompetence on his side. Sir, have you any clue of the reason for why your chief economic commentator keeps mum on it? Should you not also be slightly concerned about it?

@PerKurowski

The amazing Achilles heels of the Basel Committee’s bank regulations

Since development seems not really mean the same for UK than for China, why should UK join AIIB?

Sir, I am from Venezuela, and the United States has at least recently criticized what is happening in my country, while China in most non-transparent ways has mostly dedicated itself to finance and take advantage of what is happening in my country. And that I confess is one subjective reason for why I find it so hard to agree with Martin Wolf’s “It is folly to rebuff China’s bank”, March 24.

But that said I also feel that in order not to lose yourself in the new globalized world, you need to be able to reassert who you really are, now more than ever. And in that respect, few are so close as the US and Britain. In April 1999, feeling that the UK could become slightly uncomfortable with EU and with the Euro, and having heard about the ideas of Conrad Black and Paul Johnson, I even speculated in an Op-Ed about “A new English language empire”.

In essence I find no good reason why the UK should lend some credibility, against what is clearly no real influence, to an organization that does not really share its values. I am certain that, at least for the time being, when Wolf and I, UK and US, speak about development, we mean something quite different than what current China does… or at least so I hope.

PS. And, sincerely, I find Martin Wolf’s “As a former staff member of the World Bank” statement, indicating that as far as not living up to the “highest global standards”, AIIB and World Bank would stand on similar ground, to be clearly out of line.

PS. And by the way, to present oneself as a development buff, while at the same time not objecting to those credit-risk-weighted equity requirements for banks that clearly stand in the way of development, is sort of silly.

@PerKurowski

Martin Wolf, stupidity is not "frighteningly near", it is already here, and it is well entrenched.

Sir, Martin Wolf, with respect to immigration, correctly argues that “the presence of hard-working and ambitious people speaking a multitude of languages and offering a diversity of culture, while fitting with the predominantly liberal culture of the UK, should surely be welcomed”, “Fear of immigration is no reason for Britain to leave Europe” November 28.

And Wolf rightly concludes “It would be folly to let a paroxysm of anxiety over immigration drive the debate on whether UK should stay in EU… unfortunately, that degree of stupidity seems frighteningly near”.

But, let me ask Martin Wolf, sort of for the umpteenth time: what’s the use of inviting immigrants who could provide much dynamism if at the same time, you are fighting against the number one source of dynamism, namely risk-taking?

The credit risk weighted capital requirements for banks, which provide banks with much more incentives to finance the “safer”, the old, the history, than the “riskier”, the new, the future, tells me stupidity has already arrived. And, observing how the debate ignores the distortions in credit allocation these regulation produce, I would venture that stupidity is firmly entrenched.