Any new social contract for America needs to rectify and use equal risk weights for Sovereign and We the People

Sir, Anne-Marie Slaughter writes: “Where Roosevelt echoed Alexander Hamilton, emphasising a contract between citizens and government, Mr Ryan puts “society, not government, at the centre of American life”. Government exists to support citizens in solving their own problems. They agree on the imperative of genuinely equal opportunity for all but disagree on the scale and scope of government action necessary to achieve it.” “The world awaits America’s new social contract” January 18.

Since 1988, with the Basel Accord, for the purpose of setting the capital requirements for banks, the risk weight for the Sovereign, meaning the State, was set (by obvious statists) to a mindboggling zero percent. While the risk weight for We the Not-rated People, was determined to be 100%.

That subsidizes government debt, which is paid by lesser access to bank credit for SMEs and alike.

That, since it implies that government bureaucrats know better what to do with bank credit, puts the government squarely at the centre of American life.

Worse yet, American bank regulators have also extended the courtesy of lower risk weights to many foreign sovereigns, and to the AAA-risktocracy, wherever it lives.

I would prefer for instance a 75% risk weight for We the People and one of 100% for the sovereign but, if that’s not possible, the least the Ryans in America should do, is to be sure the state and citizens are weighted equally.

Sir, when I write this, there’s only one day left before 100% risk weighted citizen borrower Trump passes, as President Trump, to head the zero risk weighted borrower.

@PerKurowski

Why is obvious crony statism referred to as crony capitalism?

Sir, I refer to Martin Wolf’s “Why Xi cannot succeed with his reforms” December 14.

In it, Wolf quotes the following from Minxin Pei’s “China’s Crony Capitalism”: “The emergence and entrenchment of crony capitalism in China’s political economy, in retrospect, is the logical outcome of Deng Xiaoping’s authoritarian model of economic modernisation… because elites in control of unconstrained power cannot resist using it to loot the wealth generated by economic growth.”

But “Capitalism” (at least according to Wikipedia), “is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. In a capitalist market economy, decision-making and investment is determined by the owners of the factors of production in financial and capital markets, and prices and the distribution of goods are mainly determined by competition in the market.”

Sir, so why does it refer to “crony capitalism” when it is clearly much more a case of “crony statism”? Could it be that the “unconstrained power of the elites” also cover the terminology we are to use? Like for instance when references are made to our economies being under the yoke of “neo-liberalism”, all while bank regulators gladly risk-weigh Sovereigns with 0%, and We the People with 100%. Or like when intrusive and complex bank regulations are mentioned to have happened in a period of "deregulation".

PS. Here is the current summary of why I know the risk weighted capital requirements for banks, is utter dangerous nonsense.

@PerKurowski

Italy would have been far from as troubled as it is, if regulators had not distorted bank credit.

Sir, Mariana Mazzucato writes: “Increasing investment is essential to Italy’s future, as is fundamentally changing public-private relationships to make them less focused on favours and subsidies, and more on transformational opportunities”, “Italy’s future growth hinges on new ways of doing business” December 13.

Let us be clear. Most true “transformational opportunities” arrive by means of the market, and many “transformational opportunities” is just a code word for crony-statism profiteering.

There is one major fact that is being constantly evaded in the debate about Italy’s and most other economies. That is the distortion the risk weighted capital requirements for banks cause in the allotment of credit to the real economy.

Italy would never have accumulated so much public debt, had it not been for the false market signals that resulted when the Basel Committee decided to assign a zero risk weight to the sovereign and one of 100% to We the People, that which includes SMEs and entrepreneurs.

De facto those risk weights translate into a belief by regulators that government bureaucrats know better what to do with bank credit than the private sector… something that unless you are a runaway statist, make no sense at all.

Even at this point, according to Basel II’s standardized risk weights that are still being applied, the weight given to the Italian public sector debt is lower than that of most participants in that real economy that represents Italy’s best chance for the future. Especially when bank capital is very scarce, like now, any little difference in capital requirements means a lot.

Italy and all other have no chance of regaining some rationality in the allocation of bank credit, unless this lugubrious piece of regulations is eliminated.

Obviously, you cannot make the changes all at once, without severely affecting bank credit. But grandfathering previous capital requirements for existing assets, on the margin, for all new bank assets that regulatory discrimination must stop.

PS. Let’s stop talking about crony capitalism when obviously, what is happening, is crony statism.

@PerKurowski

Are risk weights of: Sovereign 0%, We the People 100%, imposed arbitrarily by regulators, compatible with democracy?

Sir, David Pilling refers to a recent paper by Roberto Foa and Yascha Mounk, that cites findings in the World Values Survey, asking Americans whether they approve of the idea of “having the army ‘take over’. In 1995, one in 16 agreed. Since then, that number has risen steadily to one in six.”, “A continent where the democratic dream lives on” December 8.

I come from a country, Venezuela, in which each day more and more people are toying with the idea of calling in a “new” military, not to have less democracy, but to have more.

And so perhaps the American’s desilusion with democracy that the survey hints at might also reflect that democracy has failed being democracy.

For instance, is the decision process going on in Brussels really compatible with the European democracies? Those voting for Brexit seems to have answered NO!.

And in America, the regulators, for the purpose of setting the capital requirements for banks, surreptitiously set risk weights of 0$% for the Sovereign and 100% for We the People. And that, which is something that clearly reads like a slap in the face of its Founder Fathers, seems as big failure of democracy as they can come. 

So in America, supposedly the world’s prime capitalistic society, statism was imposed. Democratically? No way Jose! 

@PerKurowski

Is “crony capitalism” the right term for what’s going on? Crony statism seems a much more precise label.

Sir, you write correctly: “If political whim means companies are to be blocked, bullied or bribed out of investing where they see fit, a natural part of the functioning of the global economy will be subverted…. The idea of a world in which capital is allowed to flow freely to its most productive location is increasingly under threat… When the capital development of a country becomes the by-product of a game of political bargaining, the job is likely to be ill done.” “Politicizing investment makes the world poorer” December 3.

Indeed most of us dislike any special favoring arrangements between some private sector agents and some public sector representatives, but Sir, let me ask you two questions:

Why do you keep silence when, with their risk weighted capital requirements for banks, regulators do not allow credit to flow freely to its most productive location, just in order to have these flow to where in their petty minds banks can, at least in the very short term be more safe?

And when you know regulators set the risk weight for the sovereign at 0%, while We the People, like SMEs and entrepreneurs, are hit with one of 100%; which translates directly as regulators helping government bureaucracy to have easier access to bank credit than that of the private sector, instead of crony capitalism, is that not really more a case of outlandish crony statism?

PS. Ask the Greeks if the low capital requirements for their government that allowed it to take on so much debt made them any richer?

@PerKurowski

Dominic Rossi: Populist bank regulation “strongmen” have promoted the state apparatus ever since 1988’s Basel Accord

Dominic Rossi writes: “The twin freedoms of capital and labour movement are fading, secular relics from a passing liberal age… The tendency of “strongmen” to use the state apparatus to conjure up growth will set our new course. The tedium of recent years, slow but steady growth, looks set to be dislodged by the seductive alchemy of a fiscally induced boom-bust cycle beloved by populists” “Dr Doom awaits seat at table as president-elect enjoys a free lunch” November 24.

Sir, I am sorry, we are already there. The Basel Committee for Banking Supervision’s technocrat strongmen, in 1988 decided that for the purpose of capital requirements for banks, the risk weight of the sovereign was 0% and that of We the People 100%. Could there be a more devious way of favoring the growth of a “state apparatus”?

Where would the rates on US Treasuries, those that usually serves as a proxy of the risk free interest rate be without this enormous regulatory subsidy? 

And that subsidy does not come free. Since decreed, it has been paid by millions of SMEs and entrepreneurs not getting access to bank credit on real undistorted market terms.

Rossi writes: “The repatriation of offshore US corporate balance sheets will help finance the good times” Yes and no! It might help finance good times for government if it causes more fiscal income, but let us not forget that those balance sheets might already be fully invested in US assets.

Rossi ends in: “Populism and strong currencies are rarely seen together for long.” Indeed it will, sooner or later, guarantee the dangerously overpopulation of what is decreed, perceived or concocted as safe havens… and when that happens everything will come tumbling down 

@PerKurowski

Minimal capital requirements are a potent growth hormone for too big to fail banks.

Sir, I refer to Ben McLannahan’s “Kashkari scheme to end ‘too big to fail’ deserves a fair hearing” November 20.

Neel Kashkari, Jeb Hensarling and Thomas Hoenig are all correct in requiring banks to hold more equity… the minimum capital requirements of 1.6% and less, meaning leverages 62 times to 1, and more, have been the most potent growth hormones ever for the too big to fail banks.

But, since I sincerely believe that one of the greatest dangers for the banks, and for the real economy, is the distortions produced by risk-weighted capital requirements, were this source of distortion to be completely removed, then I think that a 8 to10 percent capital on all assets would suffice… especially if there is a clear reduction in the moral hazard producing government guarantees… especially if the prosecutors of wrong-doings begin to go after the responsible executives and not just shareholders’ capital.

That fixed capital requirement of 8 to 10% should of course also be applied to sovereign debt.

Though I am not a US citizen, I do have immense respect for USA’s Declaration of Independence and Constitution, and I must say, pardon me, that the risk weights of 0% the Sovereign and 100% We the People, reads to me like a slap in the face of the Founding Fathers.

PS. Clearly there is a conflict between wanting the banks to hold more capital, which would be the result of eliminating current risk weighted capital requirements, with wanting the banks to also serve the credit needs of weak economies. But there are ways to harmonize, like grandfathering any changes in the capital rules meaning leaving them as is for all the current assets of banks.

PS. You might ask yourselves what do I have to do with all this. Let me be clear, as a Venezuelan, and a Polish citizen, one whose father was liberated by American soldiers from a concentration camp in 1945, and as a grandfather of two Canadians, I am absolutely sure we all have much skin in the game with respect to how it goes for America… (And that goes for you too Sir… much more that you would naturally want to admit) 

@PerKurowski

No one saw how the liberal/free-market 1989 fall of the Berlin Wall was pitted against the statist 1988 Basel Accord

Sir, ‘end of history’ Francis Fukuyama, when referring among other to that “systems designed by elites — liberalised financial markets” writes: “Today, the greatest challenge to liberal democracy comes not so much from overtly authoritarian powers such as China, as from within” “US against the world? Trump’s America and the new global order”, November 12.

If Fukuyama, like most other discussing the post 1989 world had taken notice of the 1988 Basel Accord, their conclusions would have been quite different. As a minimum they would not be referencing a liberal world order.

That is because the introduction of risk-weighted capital requirements for banks, which set a risk weight of 0% for the sovereign and 100% for the We the (risky) people, has obviously nothing to do with a liberal order, and much more to do with runaway statism.

Sir, the so often mentioned and disavowed neoliberalism is simple froth on the surface. Pure and unabridged statism is the real undercurrent that guides our economies.

If only researchers, for instances at the IMF, had researched what those bank regulations have signified to lower the interests on public debt, and to make it harder for SMEs and entrepreneurs to access bank credit, our current financial policies, and consequently our economies, would have looked quite different.

@PerKurowski

It is time for America to ask bank regulation’s risk weights of 0% Sovereign and 100% We the People, to take a hike!

Sir, Martin Wolf, in reference to the United States writes: “In the country of the blind, the one-eyed man rules… the next administration will take over a country with mediocre growth of productivity, high inequality, a growing retreat from work and a declining rate of creation of new businesses and jobs… loss of dynamism… business fixed investment has been persistently weak… rise of new regulatory barriers is disturbing.” “An economic in-tray full of problems” November 9.

Of course, as usual, obsessively, Wolf says not a word about the possibility that the risk weights of 0% sovereign, 20% AAA rated, 35% residential housing and 100% SMEs, set for the purpose of defining the capital requirements for banks, are distorting the allocation of bank credit to the real economy, with disastrous consequences.

At least last week, during IMF’s Annual Research Conference, at the very end of the conference, none other than Olivier Blanchard, the former Chief Economist of the IMF, admitted that: indeed more research was needed to better understand the underlying factors for the trend to lower public debt interests that can be observed the last 30 years; and that this trend might very well be explained to a certain extent by current bank regulations.

When the truth about the risk weighted capital requirements for banks unravel, I wonder how Mr. Wolf is going to explain his and FT’s silence on my thousands of letters.

By the way, after yesterdays American election results, is it not high time for the Home of the Free and the Land of the Brave to ask those risk weights of 0% Sovereign and 100% We the People, to take a hike?

PS. What caused the unexpected election results? I really don’t know, I am not American so I did not have to vote (phew what a relief) but the irritating smugness of technocrat and media besserwissers, sure must have played an important role.

PS. I forgot, fairly recent I twitted: “As I see it there's one vote for the next 4 years, and then there’s one for the next 40. The latter could be for Gary Johnson”

@PerKurowski

There is already an unknown and hidden, odiously regressive, hugely distorting, levy on financial transactions

Sir, Gregory Meyer reports on levies on financial transactions that have been proposed in the US by Democratic politicians “US markets braced for trading tax grab” October 11.

One can easily understand the political appeal of such taxes, but also that all these could have unexpected consequences, many quite contrarian to the initial objectives.

That said, let me remind you of the financial sector’s “risk-weighted capital requirements for banks” tax; essentially based on assigning to the Sovereign a 0% risk weight and to We the People one of 100%.

That tax allows governments to collect revenues through the not so transparent channel of having more and cheaper access to bank credit. Unfortunately most of that tax is not paid by the rich and wealthy, but by the not wealthy SMEs and entrepreneurs, by means of lesser and more expensive access to bank credit.

Not only is it an immensely regressive tax, the AAArisktocracy is risk-weighted at only 20%, but, as an “unexpected that should have been expected consequence”, it also ends up causing stagnation that diminishes government ordinary tax revenues.

Even worse, that tax stimulates banks into creating excessive exposures to what has always been more dangerous to the stability of the sector, namely what has ex ante been perceived as very safe, but that ex post could turn out to be very risky.

Sir, compared to this tax, all other financial transactions taxes proposed, seems almost irrelevant.

@PerKurowski ©

I don’t understand how the British people can accept so quietly the Basel Committee’s risk weights.

Sir, Elaine Moore writes: “British debt — one of the oldest securities in the world whose roots can be traced back to King William III’s desire to fund a war in France — should be relatively straightforward. Domestic and international investors regard the UK as a safe bet” “FT Big Read: UK Gilt complexities” September 15.

Moore ignores here the effect of current bank regulations but I must say, to me, as an outsider, it is truly hard to understand how, in these days, the British people allow the Basel Committee to assign them a risk weight of 100% while giving the AAArisktocracy one of only 20% and the Sovereign a 0%.

Where would Britain have been today had these risk weights, that clearly discriminate against the access to bank credit of SMEs and entrepreneurs, been in place since King William III’s days?

Don’t you think that your governments have it easy enough to sell gilt without having to give it this regulatory subsidy?

I wonder if anyone at BoE has given the slightest thought to where interest rates on new gilt sold would be, without a little help from the Basel Committee?

Sir, doesn’t anyone in FT know that the “little help” is paid by the lesser or more expensive access to bank credit of some other? 

@PerKurowski ©

Lawrence Summers wants to get the quality infrastructure jobs now, and leave the bill to future generations

Sir, Lawrence Summers writes “Infrastructure investment can create quality jobs [and] expand the economy’s capacity in the medium term and mitigate the huge maintenance burden we would otherwise pass on to the next generation” “Building the case for greater infrastructure investment” September 12. 

And since that is based on taking on more public debt that shamefully sounds like: “Dear lets go out tonight to enjoy that great restaurant. We can leave the bill to our grandchildren, as the interest rates they have to pay are so low.”

Summers backs up his proposal with some calculations that start with “The McKinsey Global Institute has estimated a 20 per cent rate of return on such investments.”

Well Professor Summers, and McKinsey, and so many other, because they do not know, or because they are pushing a statist agenda, completely ignore the fact that currently the sovereign, meaning the government represented by government bureaucrats, for the purpose of setting the capital requirements for banks, is risk weighted at 0%; while We the People, represented by SMEs and entrepreneurs have to carry a risk weight of 100%.

That subsidizes the borrowing costs of the government, by the taxing the possibilities of accessing bank credit of those who we need most to have access to bank credit.

Of course much infrastructure investment needs to be done, but, in order for there being an economy that could use such infrastructure, much more important is it to take down that odious regulatory wall.

Sir, again, banks are no longer financing our grandchildren’s future, they are only refinancing mine, yours, Professor Summers’s and all McKinsey’s safer past.

What a disgraceful way of giving the finger to that intergenerational social contract Edmund Burke wrote about.

@PerKurowski ©

Martin Wolf seems slightly lost in the oceans of global bank regulations

“A natural connection exists between liberal democracy.. and capitalism... They share the belief that people should make their own choices as individuals and as citizens.” “Democratic capitalism is in peril” August 31.

Absolutely! But Martin Wolf seems not to agree with the right of accessing bank credit freely, and gladly accepts regulators distort with risk weighted capital requirements for banks.

Wolf opines: “Capitalism is inegalitarian, at least in terms of outcomes”

Absolutely not! Capitalism both takes away from the lazy and by offering opportunities, gives to those with initiatives and is therefore extremely egalitarian! It is when besserwissers, like those in the Basel Committee intervene, that capitalism stands no chance to deliver opportunities for all.

Wolf writes: “Today, however, capitalism is finding it far more difficult to generate such improvements in prosperity.”

Yes, how could it not, when regulators allow banks to earn higher risk adjusted returns on equity when lending to the safe than when lending to the risky.

Wolf writes: “Controlled national capitalism would then replace global capitalism”

Frankly, has that not already happened with the risk weights of the sovereigns set at 0% and that of We the People at 100%?

Wolf writes “My view increasingly echoes that of Prof Lawrence Summers of Harvard, who has argued that “international agreements [should] be judged not by how much is harmonised or by how many barriers are torn down but whether citizens are empowered… if the legitimacy of our democratic political systems is to be maintained, economic policy must be orientated towards promoting the interests of …the citizenry”

Sir, frankly, how can citizens be empowered when bank regulators decide that the risk weight of the sovereign is 0%, that of the AAArisktocracy 20%, and that of We the People 100%?

Democratic capitalism is in peril? No it has already been defeated. To recover it let’s get rid of current bank regulators and their dumb regulations.

PS. Here is one new attempt to get people like Martin Wolf to understand what has happened. 

@PerKurowski ©

There’s a distortion of the allocation of bank credit to the economy that does not want to be named, but must be named.

Sir, Mohamed El-Erian writes: “BoE had already gone beyond consensus expectations… by skillfully combining four elements — an interest-rate cut, a reinvigorated and broadened asset purchase program (QE), a special funding scheme for banks, and effective communication” ,“Bank of England bond-buying needs a fiscal helping hand” August 16.

How sad BoE is not skillful enough to understand that a regulatory distortion of the allocation of bank credit to the real economy is blocking the chances to achieve stronger and more sustainable economic growth.

What distortion do I refer to? The risk weighted capital requirements for banks of course. That which allows banks to leverage equity more with assets perceived as safe than with assets perceived as risky; and thereby that which results in banks earning higher expected risk-adjusted returns on equity on assets perceived as safe, than on assets perceived as risky.

As a result too much of BoE’s, and other central banks, and fiscal stimulus, gets to be wasted; by mostly flowing to increase the value of existing assets (stagflation profiteering) and by that way hindering the opportunities of “risky” SMEs and entrepreneurs to gain access to bank credit.

What would happen to UK government borrowings if the sovereign UK, now assigned a zero percent risk weight, had to carry the same risk weight as We the People, 100 percent? To top it up there are many other statist pro-government funding subsidies.

Sir, we have to find a smart way to urgently work our banks out of these regulations, something made difficult by the fact our current bank regulators simply do not know what they are doing. Ask them and you’ll see.

Finally, for someone from a country suffering murdering inflation, Venezuela, it is a real shocker having to read highlighted in FT: “Owning a printing press, the BoE faces no funding constraint”

@PerKurowski ©

Any central banker that distorts, just as he likes, the allocation of bank credit to the real economy, is not to be trusted

Sir, John Authers writes: “If I report that government bonds are selling for unprecedented low yields, because investors are looking for safe places for their money — both of which are undeniable and unexceptional propositions — abuse follows. Markets are fixed! Yields aren’t really that low!” “Central banks are not the enemy: Monetary policy has stayed too loose for too long: that is a failure of politicians” July 28.

In this context am I abusing when I hold that markets are to a very important extent fixed, only because banks are looking for places for their money that does not require them to hold much capital? I don’t think so!

And Authers writes: “Markets are not efficient, and are often wrong…But they are not part of a political process, and ignoring them is not an option. When they set the price at which we can borrow, or at which we can exchange currency, they create truths we have to live with”

Absolutely, but in this case bank regulators, most from central banks imposed their truths on the market.

Sir, though regulators would love you to do so, do not forget what assets caused the 2007-08 crisis.

Those were what was ex-ante perceived, decreed or concocted as very safe, and which, for that reason only, the regulators allowed banks to hold these assets against very, very little capital.

Assets perceived as risky do no set off major bank crises, that distinction belongs to what is perceived as safe, and that is what our dumb regulators ignored

And what has much stopped the economy from recovering in the face of enormous injections of liquidity? That the liquidity, because of bank regulations, central banks, are not allowed to flow freely by means of bank credit to the “risky”, the SMEs and entrepreneurs.

Of course I would love to trust central banks, but I just can’t. Anyone who comes up with an idiotic and statist idea like that of assigning a risk weight of 0% to the sovereign and 100% to us We The People, is not to be trusted.

@PerKurowski ©