US Congress, keep the US Export-Import-Bank open, you’ve got much more serious credit distortions to fight.

Sir, with respect to the US closing Exim Bank you write about “the economic equivalent of unilateral disarmament in a world bristling with nuclear weapons” as if the one disarming was doing what’s immoral, “The wobbly economic leadership from America” April 25.

You write “In the past two years, Chinese development banks have lent $670bn in subsidized credit in subsidized credit to help domestic companies win bids all over the world… more than all Exim guarantees since set up in the 30s” and still you argue that Exim-Bank could serve “as a check on crony capitalism practiced by China and others? 

And you write “No private sector bank will finance 15 year emerging market projects” Of course not, why should they when they are allowed to hold less equity when lending to already emerged markets perceived as safer?

Would I close Exim-Bank? No, I have been able to use it very satisfactorily during my life, so that would be something extremely ungrateful of me. But, that said, much more important than keeping it open, is to get rid of the credit-risk differentiated equity requirements for banks, those which distort immensely the allocation of bank credit all around the world. The Basel Committee, that’s what the US Congress should really be working to close down, or at least forbidding it to discriminate between borrowers.

@PerKurowski

On bank regulations why can’t we get to the heart of its problems? Why can’t we keep political agendas out of it?

Sir, I refer to Edward Luce’s “Too big to resist: Wall Street’s come back” December 14.

Anyone who with an open mind reads Daniel Kahneman’s “Thinking, Fast and Slow” 2011, or this years “World Development Report 2015: Mind, Society, and Behavior” issued by the World Bank, should be able to understand the following with respect to current bank regulations:

Regulators (and ours) automatic decision-making makes us believe that safe is safe and risky is risky; while a more deliberative decision-making would have made us understand that in reality very safe could be very risky, and very risky very safe.

And so when so many now scream bloody murder about the influence of big banks in the US congress, because these managed to convince legislators to allow “banks to resume derivative-trading from their taxpayer insured arm”, they posses very little real evidence of what that really means… except, automatically, for the fact that it all sounds so dangerously sophisticated.

No, if there is something we citizens must ask our congressmen to resist, that is the besserwisser bank regulators who, with such incredible hubris, thought themselves capable of being risk-managers for the world, and decided to impose portfolio invariant credit risk weighted capital requirements for banks.

These regulations distorted all common sense out of credit allocation, and cause the banks to expose themselves dangerously much to what is perceived as “absolutely safe”, while exposing themselves dangerously little for the needs of our economy to what is supposedly “risky”, like lending to small businesses and entrepreneurs.

If we, based on what caused the current crisis should prohibit banks to do, it would have very little to do with derivatives, and all to do with investing in AAA rated securities, lending to real estate sector (like in Spain) or lending to “infallible sovereigns” like Greece.

Does this mean for instance that I do not agree with FDIC’s Thomas Hoenig’s objection to US Congress suspending Section 716 of Dodd-Frank? Of course not! But, before starting to scratch the regulatory surface, something which could create false illusions of safety, or even make it all much riskier… we need to get to the heart of what is truly wrong with the current regulations… Sir, enough of distractions!

And also enough of so many trying to make a political agenda and election issue out of bank regulations… as usual it would be our poor and unemployed or under employed youth who most would pay for that.

When banks earn higher risk adjusted returns on equity financing houses than financing the creation of jobs… something is wrong.

Sir, Congressman John Delaney writes “A significant contributor to the financial crisis was the governments mispricing of risk” “A pragmatic plan to free the mortgage market from Washington” April 21.

That is not exactly so. First, it is never the role of the government to correctly price risks, but to insure there are sufficient defenses for when the market and banks fail to correctly price risk… in other words, to care more for the unexpected than about the expected. And, while doing so, it is also definitely not the role of the government to distort the markets… something which unfortunately it has been doing lately.

With those risk-weighted capital requirements that have been so much in vogue lately among regulators, by allowing banks to hold much less capital against what is perceived as “safe”, which does not mean it will be safe, than against what is perceived as “risky”, which does not mean it has to be risky, regulators have allowed banks to earn higher returns on equity when lending to the safe than when lending to the risky… and of course that distorts. For instance it allows banks to earn more financing the houses than financing the riskier creation of jobs needed to pay for those houses.

When Congressman Delaney so correctly writes to remove “the harmful distortion that government involvement causes” I just wish he knew more about the mother of all regulatory distortions.

Indeed... why not a tax on too-big-to-fail-banks?

Sir, I refer to James Politi’s and Gina Chon’s “Big banks pledge to fight tax on assets” February 26.

In May 2003, more than a decade ago, as an Executive Director of the World Bank (2002-2004), below is what I told some hundred bank regulators gathered at the World Bank for a Risk Management Workshop.

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

And while you're at it, Mr. Dave Camp, US Congress, House Ways and Means Commitee, look into this too

Wolf, when spinning the US debt ceiling in favor of the spender, do not forget there is also a roof to get off.

Sir, Martin Wolf might be entirely correct when describing some of the possible horrible consequences of the US debt ceiling not being increased, but he is sure spinning the issue entirely in favor of the spender, “The debt-ceiling doomsday device” October 16.

I find the US Congress having to approve a debt ceiling, which is the same as a debt-roof from which the US has to get off from, sooner or later, to be something perfectly valid. When spending bills are presented, these are not “whatever it takes” spending bills, but spending which assumes some type of income. And, for the case those income assumptions are not met then any congress, as any corporate board, should have all the right to say… “Great! But as long as you do not take on more debt than x”.

And what would the markets be saying if all been smooth sailing for the US executive branch to take on any debt it wanted… would that not spook these even more?

PS. As for me, as Martin Wolf knows well, I am much more concerned with the shutdown of access to bank credit for the "risky" real economy, which regulators ordered with their dumb capital requirements for banks based on perceived risk.

FT, are you afraid of the Basel Committee on Banking Supervision curia excommunicating you?

Sir, you loudly preach from your very high pulpit, that the “non-partisan Congressional Budget Office’s updated [fiscal] forecast… should shock Congress out of its complacency…so as to put American’s wellbeing ahead of its differences…[though] even if they do find a solution; the outlook is hardly rosy”, “Vertigo atop the US fiscal cliff” August 24. 

And again I find myself wondering why you do not include in your sermon, some words on the fact that when bank regulations like the current are so much biased in favor of bank lending to those perceived as “not-risky”, and against those perceived as “risky”, this dooms the economy to dangerous obesity and simultaneous muscular dystrophy. Could it be that though you declare yourselves “without fear”, you are scared of what the high priests of the Basel Committee on Banking Supervision curia would have to say? FT excommunicated? 

Well, in the best protestant traditions, I at least am nailing up, wherever I can, my protest against that silly-nanny belief that economic prosperity can be reached, or even maintained, by avoiding, or even punishing, risk-taking and risk-takers, such as the small businesses and entrepreneurs. 

I also wonder what the US congress would have to say, if they understood that current regulations are making their bankers, in “the Home of the Brave”, to lend the umbrella when the sun is out much more than what Mark Twain ever thought possible, and to, similarly, take it away much faster than what Mark Twain could ever have imagined?

President Obama and the US Congress are debating the debt ceiling blindfolded

Sir, with respect to the current debate in Washington on lifting the US debt ceiling it is important to reflect on the fact that had there been no quantitative easing programs, or bank regulations that favor so much sovereign debt, the interest rates on US debt would have long ago been so much higher so as to make perhaps this debate completely superfluous. 

In essence, because of the interference, the President and the Congress they do not know what the real market interest rate is on the US public debt, and they are therefore debating blindfolded.

PS. Loony bank regulations explained in an apolitical red and blue!

Mr Issa, then do something about it!

Sir, Darrell Issa writes that “assuming government can allocate resources and spur growth more effectively than market forces is a mistake America must never allow to happen again” “Obama´s Keynesian failures must never be repeated” February 8. He might not be aware that America and much of the world has hardwired such an assumption into their financial regulations.


When a bank is required to have 8 percent capital when lending to a small business or an entrepreneur, but does not need any capital at all when lending to the government, it is precisely that the government can put the savings of the nation at better use what you are assuming. And the US Congress recently passed 2000 plus pages of financial regulatory reform without showing the slightest intention of reneging on such an assumption.

For the umpteenth time, the current system of capital requirements for banks concocted at the Basel Committee is stealth communism.