FT, Western liberalism might not be obsolete but it sure isn’t what it was a couple of decades ago.

Sir, with respect to Vladimir Putin’s recent claim — “that liberalism is obsolete” you opine his “triumphalism is misplaced. Not all of liberalism is under threat. The superiority of private enterprise and free markets — at least within individual nations — in creating wealth is no longer seriously challenged.” “No, Mr Putin, western liberalism is not obsolete” June 29.

You are only partly right, because nowadays-Western liberalism is not what it was. 

When regulators allow those that are perceived, decreed or concocted as safe, to be able to offer their risk-adjusted interest rates to banks leveraged many times more than those perceived as risky, as has been the case since 1988, that has absolutely nothing to do with free markets.

And assigning for the risk weighted bank capital requirements a 0% risk weight to sovereigns, and one of 100% to citizens, has nothing to do with “superiority of private enterprise” either. Those risk weights de facto imply that bureaucrats know better what to do with bank credit they are not personally liable for, than private sector entrepreneurs, and that has much more to do with statist a la Putin regimes.

@PerKurowski

John Kenneth Galbraith would probably include Alan Greenspan among men of wisdom that missed the point.

Sir, Robert Gordon, reviewing Alan Greenspan’s and Adrian Wooldridge’s “Capitalism in America: A history” writes: “Three themes are highlighted — productivity as the measure of economic progress; the “Siamese twins of creation and destruction” as the sources of productivity growth; and the political reaction to the consequences of creative destruction.”, “After the gold rush”, October 20.

I have not read that book yet, I will; creative destruction plays absolutely an important role in the acceleration and sustainability of growth.

I do not know Adrian Woodridge, but, when it comes to the former Fed Chairman Alan Greenspan, I have an inkling that if John Kenneth Galbraith was still around, he would suggest Greenspan does not have all what it takes to write that book.

Let me explain that by quoting from Galbraith’s “Money: Whence it came where it went” 1975: “For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.”

Alan Greenspan clearly fits in with those “Men of economic wisdom” (of the East) who are distasted by unstable banking. To make banks stable, he supported risk-adverse risk weighted capital requirements, much lower for what’s perceived safe (the present) than for what’s perceived risky (the future). 

Sir, and if one is to tellthe real “full, epic story of America's evolution from a small patchwork of threadbare colonies to the most powerful engine of wealth and innovation the world has ever seen”; which is how this book is being promoted, one would need to begin with the willingness of its people to take risks.

What would have happened to America if banks with risk-weighted capital requirements had met its immigrants? Probably that imagined 1620 meeting in Davos about the future world, in which “one region goes unmentioned: North America. The region is nothing more than an empty space on the map” would not have found its way into this book.

The saddest part of all this is that our current generation of central bankers and regulators, like Alan Greenspan, those who prioritized bank stability over growth, as if these two aspects could be separated, anyhow did it totally wrong. With their risk weighted capital requirements, they only guarantee that banks will end up with especially big exposures, against what’s perceived as especially safe, against especially little capital; something which can only cause especially big crises, like that of 2007-08.

PS. Galbraith’s book also explained that, de-facto, regulators had also decreed inequality

PS. Gordon writes about “millions of immigrants being drawn in from Europe as the ever-expanding railroads, enjoying massive government subsidies in the form of free land, in turn subsidised the new arrivals so that they would populate the west.”.  I am not sure that amounted to “massive government subsidies”. If not zero, most of it must have been extremely low valued land. It was those migrants who with their sweat, inventiveness and willingness to take risks built up the value of that land.

PS. Gordon complains the book has “only a page or two reckons the human cost of underpaid labourers, including the consequences of malnutrition [and on] labour unrest”. That reads just like political correctness’ flag waving; and belief in that if only the task of development was assigned to the right kind of central planners, his kind, it would be achieved in a nice and fair way, with no sufferings and no inequality.

PS. In Venezuela, during a conference, 1978, forty years ago, John Kenneth Galbraith autographed “Money” for me. Mine was the only one he signed explaining he did so because it was a pocket book and much underlined  J His book inspired the first Op-Ed that I wrote, more than twenty years ago.

@PerKurowski

What if Britain could use a Remain to make the EU a more worthy union?

Sir, Martin Wolf writes “EU is a peace project that works by embedding mutual relations in a framework of equally-applicable and legally-binding rules. The mutual trust necessary to make the EU work depends on this.” “Misunderstanding the European project” October 5.

How beautiful, but does the reality stand up to this? I don’t think so. As example EU authorities, for the risk weighted capital requirements for banks decreed a 0% risk weight for Greece and, as a direct consequence Greece was offered too much credit and, unable to resist, took on too much debt. But then EU blamed Greece for it all, and left it alone to pay for it all.

Also, the number one EU challenge is to help many of its members meet the challenges the euro poses, challenges that were known from the very start. Have they done this? No, in the euro’s soon twenty years, EU techno/bureaucrats have spend more time on a lot of other minor issues that sometimes makes one think more of a Banana Union. 

How can/should a Remainder Britain respond to EU? Definitely not with a “sorry, we made a mistake” but much more by requiring EU to do whatever is needed to make it what Martin Wolf wants it to be.

Britain might need a EU but EU might need Britain just as much. So what a great historic opportunity it would be if Britain used a Remain to leverage EU into something much better?

If nothing comes from it that might be because the European Union dream might have been taken over by European Union profiteers and, if so, Brexit shines much better.

PS: Wolf writes “the parallel Jeremy Hunt drew between the EU and Soviet Union was so stupid and offensive. The Soviets sent tanks into East Berlin in 1953, Budapest in 1956 and Prague in 1968.” I am not that sure, the Basel Committee, with the enthusiastic approval of EU sent in 0% risk weights for sovereigns and 100% for citizens. These will prove to be more dangerous to the Western World than all Russian tanks multiplied by thousands.

PS. What would Martin Wolf suggest Britain says to the European Union if it backs down from Brexit? “Sorry EU we did not really mean it?

@PerKurowski

“Co-operate more” is often argued by multilateral technocrats only for them to interfere more

Sir, Martin Wolf writes: “Countries that contain substantial populations in relative domestic decline are consumed by the politics of rage. Yet, if progress is to be sustained and the dangers are to be managed, peaceful co-operation is necessary” and he ends with “Am I optimistic that the world will rise to the challenge? The answer is: No”, “The world’s progress brings new challenges” May 30.

I am not optimistic either. In 1998 in an Op-Ed: “History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”, and in 1999: what “scares me the most, is [what] could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”. 

And with the risk weighted capital requirements that distorts the allocation of bank credit to the real economy, the peacefully cooperating regulators in the Basel Committee realized my worst fears.

And that horrendous mistake, which included assigning risk weights of 0% to sovereigns, like Greece and Italy, and which brought us the 2007/08 crisis, and that is to blame for much of the stagnation in productivity, is not yet even discussed. There’s a total lack of transparency and accountability among those that Yanis Varoufakis rightly holds belong to a network of insiders.

Why? As Varoufakis explains in his “Adults in the room” journalists, I would argue like Martin Wolf, are also “appended, however unconsciously, to a network of insiders… [and] This is how networks of power control the flow of information.”

Wolf also refers to Kishore Mahbubani, the author of “Has the West Lost It?” arguing: “The lesson the west — above all, the US — must learn is… to interfere far less and co-operate far more [with] multilateral rules and agreements. It cannot run the world. It needs to stop its arrogant and usually foolish interventionism.” 

But again: The worst “arrogant and foolish interventionism”, that which really has the West really losing it, as it put banker’s risk aversion on steroids, is what was concocted by the Basel Committee for Banking Supervision. And its interference is like a cancer tumor that keeps on growing thousand of pages a year.

A call to “co-operate more” is always justified but, when cooperating, let us not ignore that is precisely what multilateral technocrats often ask for, only in order for them to do more besserwisser interference.

The best multilateral agreement we now could have with respect of our banks, is to set one capital requirement against all assets, a one pager regulation, and then carefully manage the process of getting the banks from here to there, while minimizing the hurting.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

PS. The best way to fight pollution, climate change [and inequality], is by means of a carbon tax with all its revenues shared out to citizens. But, since that does not allow for interesting profit opportunities that could be captured, and that could be ruled, the intervention profiteers much prefer the Paris accord on climate change.

@PerKurowski

The US might be an SOB of a superpower, but it is our (or at least mine) SOB superpower.

Sir, Martin Wolf writes: “China is, not the real threat. The threat is the decadence of the west, very much including the US — the prevalence of rent extraction as a way of economic life, the indifference to the fate of much of its citizenry, the corrupting role of money in politics, the indifference to the truth, and the sacrifice of long-term investment to private and public consumption. It is indeed a tragedy that the best way we could find to escape from a financial crisis was via monetary policies that risked promoting new bubbles. We could be better than this.” “The rivalry that will shape the 21st century” April 11.

On the “sacrifice of long-term investment to private and public consumption” I could not agree more. But that is precisely why I have been attacking, day and night, obsessively, the risk weighted capital requirements for banks. These make our banks favor way too much the financing of the present “safer” consumption (houses-governments) and stay away, way too much, from financing the “riskier” future production (entreprenuers). Unfortunately too many, Martin Wolf included, have been indifferent to that truth.

But, that said, on the first part “the prevalence of rent extraction as a way of economic life, the indifference to the fate of much of its citizenry, the corrupting role of money in politics, the indifference to the truth”, is China really better than the west or the US? 

I don’t think so, but even if it was so, when push comes to show, there comes a point when you have to decide what superpower you prefer. I have no doubt preferring the west, the US… though Graham Allison of Harvard seems to harbor some doubts on that arguing that “China rivals the US in…ideology”.

In what I entirely agree with Wolf is when, explaining it so well, he states “The idea that intellectual property is sacrosanct is wrong. It is innovation that is sacrosanct. Intellectual property rights both help and hurt that effort. A balance has to be struck between rights that are too tight and too loose”

Yes, and for years I have suggested that balancing could start by taxing the profits obtained when competing protected by intellectual property rights, at a higher rate than profits derived from competing naked in the market. And since what becomes protected with IPRs is the last leg of our human heritage inventiveness, those taxes should perhaps also help to fund a Universal Basic Income, something which would be a de facto social dividend.

PS. That said, when Wolf says “the US can huff and puff about Chinese theft of intellectual property” then I am not sure really which SOB is Wolf’s favorite superpower.

PS. For full disclose, had it not been for the US, I would certainly not be around.

PS. All morphed faces look ugly but, in reference to Times’ recent cover, if faces have to morph, what faces would you prefer to see morphing, Trump-Putin, Trump-Xi Jinping or Putin Xi-Jinping?

@PerKurowski

In terms of causing the undoing of the west’s liberal democracy and global order, Trump (until now) is nothing compared to the Basel Committee

Sir, Martin Wolf holds that: “political developments have fractured the west as an ideologically coherent entity” “Global disorder and the fate of the west”, January 3.

I argue that much more than recent political developments the west, as we knew it, at least as I thought of it, was fractured in 1988 when regulators, with the Basel Accord, came up with risk weighted capital requirements for banks.

The following were Basel II’s capital requirements for banks on exposures to sovereigns according to their credit ratings: AAA to AA = 0%; A+ to A = 1.6%; BBB+ to BBB- = 4%; BB+ to B- = 8%; Below B- = 12%; Unrated = 8%.

What have that regulation to do with “A liberal democracy [where] the participants recognise the legitimacy of other participants common…[and] rests on a neutral rule of law”?

That someone like Walter Wriston could argue, "Countries don't go bankrupt," does not mean that some sovereigns have the right to declare themselves infallible. That was never part of any (recent) global order… nor was that those citizens who perceived as safe were already so more favored than those perceived as risky when accessing bank credit, would gain additional advantages by generating lower capital requirements for banks.

The development of the west like all development does required a lot of risk-taking. The day regulators layered on their purposeless risk aversion on top of already risk adverse banks… they doomed the west to a standstill, a “relative decline”, which, with time, will turn into a fall unless we can stop that dangerous nonsense. God make us daring!

Sir, what Trump, until now at least, might be doing to cause the undoing of the west’s global order is chicken shit when compared to what the Basel Committee has done. Martin Wolf does not think so because he considers it the duty of bankers to do what is right and ignore the incentives they are given to provide a high risk-adjusted return on equity to their shareholders.

And talking about populism, is not “We have risk weighted the banks’ capital for you so that you can now sleep calm” pure outrageous technocratic populism?

@PerKurowski

Where would China be if western world had not placed a reverse mortgage on their economies, in order to keep on buying?

Sir, with interest I have read Martin Wolf’s “How the developed world lost its edge” July 20. In my opinion Wolf ignores two major events that had these not happened would have radically changed the current outlook.

First, regulators told banks: “Go out in the market and negotiate the best risk-adjusted net margins you can. And then, in order to make sure you do not take risks, we will allow you to multiply these margins much more in the case of assets perceived as safe than in the case of risky assets.”

That of course led to the accumulation of excessive exposures and against very little capital (equity), to something ex ante perceived decreed of concocted as safe, like AAA rated securities and sovereigns, which when ex-post turning out very risky caused the 2008-crisis.

And then central banks, with their QEs and ultralow interest rates, hindered the necessary market cleanup, and kicked the 2008-crisis can down the road, a road made unproductive by previous mentioned regulatory risk aversion.

So what resulted? No adjustment and further indebtedness, which allowed prices of assets to increase and demand (among other of Chinese production) to be sustained… further allowing the Chinese to save. 

Wolf writes: “The rapid growth of both trade and cross-border financial assets and liabilities and trade, relative to global output, has come to a halt. In the case of finance, plausible explanations are risk-aversion and re-regulation”. “Risk-aversion”? Yes, but not any new one but that which result from regulators loading up, on top of bankers’ natural risk aversion, there own aversion based on the same perceived risks. The bankers lend you the umbrella when the sun shine’s Mark Twain, would never have believed his eyes had he seen such regulatory nonsense.

Sir, as I’ve written to you many times before, never ever has a generation taken on so much debt to finance their own consumption, and shown so little respect for the needs of future generations, those needs that include bankers lending to risky SMEs and entrepreneurs.

How can a Western world made great by taking risks, not lose its edge by avoiding it?

Wolf concludes with: “Rising populist pressure across the high-income economies makes managing these shifts far more difficult.” Indeed, but let us not forget that this mess began when some truly inept populist technocrats, like real life Chauncey Gardiners, convinced governments they knew what they we doing.

PS. Martin Wolf also fell for it.

@PerKurowski

Martin Wolf, bank regulators ordered trust to crumble, so the west is already falling. Your silence is complicit

Sir, Martin Wolf lashes out at the possibilities of Donald Trump being elected president of US and on its consequences. I agree though I would not go to such extreme as arguing that “It would, for example, end efforts to manage the threat of climate change, possibly forever”. "If trust crumbles, the west is lost" September 28. 

But I also believe that the possibilities of the US, among democrats, republicans and We the People, to put a stop to most potential Trump lunacy is very big… almost a certainty.

But in my firm opinion the west is already crumbling thanks to those statist and risk adverse regulations that were introduced in 1988 with Basel I and that really exploded in 2004 with Basel II.

The credit risk weighted capital requirements with their risk weights of 0% for the sovereign, 20% for the AAArisktocracy, 35% for residential houses, 100% for We the (unrated) People and 150% for the below BB-rated outcasts, has completely distorted the allocation of bank credit to the real economy. The west was not built with such regulations but the west is certainly doomed to gloom with it.

Unfortunately, the world of top experts, renowned academicians and famed journalists, which includes Martin Wolf, have not been able to even bring up Basel’s distortion of bank credit into discussions. And the testers of bank stress keep on looking only at what is on the balance sheets and without caring a iota about what does not, like sufficient loans to SMEs and entrepreneurs.

If the west had to choose between Donald Trump and the Basel Committee, I know who I would vote for, again of course counting on a lot of support to reign in his worst excesses.

PS. Here are two questions that if a moderator of the US candidates for president debate I would ask:

Donald Trump, how much damage would the republicans and democrats allow Hillary Clinton to do if she is elected president?

Hillary Clinton, how much damage would the democrats and republicans allow Donald Trump to do if he is elected president?

@PerKurowski ©

What is this nonsense of a free market consensus when all banks are intervened by regulators?

Sir, Gideon Rachman refers to a weakening in the belief in free markets, “shaken by the financial crisis in 2008 and the subsequent Great Recession, as one of the causes of why “The west has lost intellectual self-confidence”, January 6.

What intellectual nonsense is this? What free-market consensus? The banks, since the inception of the Basel Accord with its Basel I in the early 90’s, and really exploding with Basel II in 2004, have been told, by means of risk-weighted capital requirements, that they can earn their highest risk-adjusted returns on equity, by sticking to the safe.

But unfortunately, medium and long-term bank stability can only result from banks allocating credit efficiently to the real economy, not from banks playing it safe.

Effectively the Basel Committee and the Financial Stability Board told their supervised children: “Stay home and play with you laptops and do not go out and take risks, and we will give you goodies”. And the IMF and the World Bank, with their silence, approved of that.

Sir, is not a child told to stay home and not to venture out, a child doomed to lose all his self-confidence, included that of in his own intellect?

Our current bank regulations are not the result of an intellectual process, but only a primitive reaction to the intuition of “safe” is safe “risky” is risky”, not able to differentiate between ex ante and ex post perceptions. 

And I pray the West still has sufficient intellectual self-confidence left, so as to throw these bank regulators out... otherwise next generations are doomed. 

PS. To top it up regulators showed an ideological based pro-sovereign-governments bias and declared those to be infallible.

Martin Wolf, silly risk aversion is not part of our western values.

In a recent OECD paper titled “Trends in income inequality and its impact on economic growth”, authored by Federico Cingano, we read the following note:

(5) With perfect financial markets, all individuals would invest in the same (optimal) amount of capital, equalizing the marginal returns of investment to the interest rate. This occurs as complete markets allow poor individuals, whose initial wealth would not allow reaching the optimal amount of investment, to borrow from the rich (infra-marginal gains from trade). If, on the contrary, financial markets are not available, and the returns to individual investment projects are decreasing, under-investment by the poor implies that aggregate output would be lower, a loss which would in general increase in the degree of wealth heterogeneity (see e.g. Benabou, 1996; Aghion et al, 1999).

Substitute “risky” for the “poor” and you should be able to understand that current credit-risk-weighted-capital (equity) requirements for banks creates an under-bank-lending to those perceived as risky that leads to a lower aggregate output, most specially that of the future, which is dependent on the risky risk-takers having fair access to bank credit.

Martin Wolf, in “Europe’s lonely and reluctant hegemon” December 10, with relation to Germany's responsibilities towards Europe tells it that “The time of thinking small is past” and that it needs to “take an assertive position in defending western values”.

Sir, I content that little is so “thinking small” than thinking that by allowing banks to hold much less capital against assets perceived as safe; and therefore allowing banks to earn much higher risk-adjusted returns on equity on these assets when compared to what they earn lending to the risky; can somehow make banks more stable, like if these lived in a vacuum isolated from the real economy, will.

And Sir, I vehemently hold that such silly risk aversion is not part of our western values, much the contrary. “God make us daring!”

And so what the Western world (including Germany) first needs to urgently realize, is that those bank regulations dooms it to stall and fall, no matter how much QE-ing, fiscal-deficiting or infrastructure constructing it does... following Martin Wolf’s instructions.

Regulators, accept gallantly you messed it all up with the risk-weighted capital requirements for banks. And amend these... please!

Sir I refer to John Dizard’s “Brussels spends too little time on reforms that could help SMEs” April 19.

Decades ago someone, I do not remember who, commented on how a board would take much less time deciding on a several million dollar technically difficult investment, than on the amount to be spent on serving coffee during their meetings.

So when John Dizard writes that “so much time gets spent on minor issues, such as high speed trading, and so little on incremental reforms that could actually ease the credit crunch for SMEs” we might have to revise that theory. The lengthiest discussions would not seem to relate to issues that board members most know about, but on issues that collectively they least know about, and where no one has the guts to display ignorance.

The risk-weighted capital requirements for banks, of Basel II and Basel III discriminate directly against the access to bank credit, in risk adjusted competitive terms, of the SMEs. It is as easy as that. The regulators should dare to admit that and make amends for it… fast. The future of the western world, the Judeo-Christian civilization, much depends on it.

There are productive and there are destructive inequalities, and we must know which are which.

Sir I refer to John Gapper’s “In search of balance: Capitalism”, December 24.

I have no problems with most of the “productive” inequalities which result from courageously moving forward – when financing the “risky” future, when increasing the cake. But I do have problems with many of the “destructive” inequalities, which occur when just trampling in the water, when extracting the last ounce of juice from any past risk taking – when refinancing the “safer” past, when only wanting to distribute the cake.

In this respect, when Pope Francis says “I exhort you to a generous solidarity and a return of economics and finance to an ethical approach that favors human beings”, I most emphatically have to state that the current capital requirements for banks based on perceived risks, risks already cleared for elsewhere, is definitely not an ethical approach to economic and finance.

And since Gapper makes a reference to Branko Milanovic of the World Bank, the author of “The Haves and the Have-Nots”, I must also comment that it is truly surprising to see how few realize how these regulations, which favor the Haves and discriminate against the Have-Nots, constitute one of the foremost drivers of “destructive” inequalities.

And that the World Bank, the world’s premier development bank, and who should be the first to know that risk-taking is the oxygen of development, keeps quiet on this whole issue, just makes me very sad for the future generations.

FT, please try to reflect on where we in the Western World would have been, had those risk-weighted capital requirements introduced over the last three decades by the Basel Accord, always applied.

How can the west have faith in its own future when its banks are hindered to finance it?

Sir, Gideon Rachman writes “The west is losing faith in its own future” December 10.

Absolutely, but how could the west not? Capital requirements for banks that are much much lower for assets perceived as absolutely safe, than on assets perceived as risky, allow banks to earn much higher risk-adjusted returns on what is “safe” than on what is “risky” and that stops banks from financing the future and makes these concentrate on refinancing, while its worth something, the safer past.

Rest assured, with its current castrated banking system, the west would never ever have become what it became.

Europe, and the Western world, is spiraling down to its death, embraced by crazy "risk" adverse bank regulations.

How on earth can Europe regain internal balance with bank regulations which are based on the principle that the safer you ex ante look, like the more surpluses you have, like Germany, the less will the banks need to hold in capital lending to you, and so the more will banks expect to earn in risk-adjusted returns on equity when lending to you, and so the less will they lend to those perceived as riskier?

That is a death spiral that will make Europe and the whole Western world implode, as it only guarantees that banks will, naked with no capital, die because of lack of oxygen, in dangerously overpopulated “safe-havens” like Germany.

If you really want to have a future, then you need to give banks incentives to finance it, and not only like now, give these especial incentives to refinance the safer past.

Sir, Martin Wolf, again, in “Germany is a weight on the world” November 6, in spite of my so many letters to him on that issue, does not make a reference to this problem described above. 

Edward Dolnick, in “The Forger´s spell”, when looking to explain how those big experts that had considered some fake Vermeer paintings original, hang on to their beliefs until death, “despite incontrovertible proof to the contrary”, quotes the psychologist Leon Festinger saying: “A man with a conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point”.

I believe that applies perfectly to Martin Wolf, but, then again, it could just the same really apply more to me. What do you think?

PS. In the article Wolf writes “just as others had a right to complain about past US regulatory failures”, but it is hard to figure out what he means with that.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

The Western world dominance resulted from risk-taking. It’s stalling and falling is the result of regulatory risk-aversion.

Sir, Sir Samuel Brittan writes about “The long foreshadowed decline of western dominance” January 4.

The management of an investment portfolio always starts by ascertaining the clients risk tolerance: whether low (conservative), moderate or high (aggressive); and defining the portfolios primary investment objectives: conservation of capital, income generation, long-term capital growth or speculative capital gain. And for those most risk adverse, the investment mandates might be described in the following terms:

Risk Tolerance: Low (Conservative). The client’s principal objective is to conserve their investment by reducing the risk of loss of capital and thus volatility of portfolio. They are aware that capital risk can never be eliminated entirely, and that this type of investment will probably be subject to inflation risk. Typically, low risk strategies will comprise predominantly sovereign bonds and cash management investments, although the client may also be willing to accept some increased capital risk, for example through investment in other asset classes with higher yields and /or capital growth potential.

Primary Investment Objectives: Conservation of capital. To seek to minimize the probability of loss to principal over time by investing in relatively liquid instruments with limited price fluctuations. The client wishes to be in a position to realize the capital of his investment at any time. Products that protect notional at maturity but that may be worth less that the notional prior to maturity will not be suitable for clients with conservation of capital as their primary.

Sir Samuel Brittan knows very well that, in the long run, such risk adverse investment mandate, is doomed to dwindle the value of the portfolio into nothing.

And Sir Samuel Brittan must also know that the western world had become what it was, thanks to a lot of aggressive risk-taking searching for long term capital growth and speculative capital gains. And in its churches we could hear “God make us daring!”

But then suddenly, in June 2004, out of the blue, authorized by who knows who, the Basel Committee for Banking Supervision instructed the banks of Europe and America, with Basel II, to follow a low risk and capital conservation investment strategy. And those instructions were given by means of allowing banks to leverage immensely more their equity with exposures to “The Infallible” than with exposures to “The Risky”. And of course that zapped completely the vitality of the western economies.

I can hear the standard objection: “What do you mean Kurowski? The banks collapsed because they took on excessive risks, not because of too little risks” And again I must clarify: No! The banks took on excessive exposures to what was officially deemed as absolutely not risky, and that is an entirely different matter than taking risks. Absolutely every asset that has created the current bank problems were assets considered absolutely safe and assets and which required the banks to hold only 1.6 percent in capital or less.

And so friends, if we do not restore urgently the capacity of our banks to finance what is risky we, in the Western world, are also doomed to dwindle into nothing. And Basel III does nothing of that sort, on the contrary it also introduces liquidity requirements based on perceived risk.

Ending bank regulatory stupidity in the US (and Europe), is a vital non-partisan issue

Sir, I refer to Conrad Black´s, “The Republicans can end 15 years of US stupidity” August 30. I would sure like to ask Mr. Black the following question: 

Suppose there was the potential of issuing trillions of dollars in “worthless real estate-backed paper certified as investment grade by the palsied lions of Wall Street”. 

What would the possibility be of that issue finding buyers if banks needed to hold 8 percent in capital against these, meaning being able to leverage their equity 12.5 to 1, instead of the 1.6 percent that was authorized by the bank regulators in Basel II, and which allowed banks to leverage 62.5 to 1? 

My answer to it would of course be: “That issue would have been almost totally unsubscribed!” That it was a tragic success, was only the result of sheer regulatory stupidity. 

If there is one thing that WMR and Mr. Ryan, or President Obama for that matter, or republicans and democrats alike, need urgently understand, is that capital requirements for banks based on perceived risk, does not only produce dangerous distortions in the markets, but is also something completely incompatible with a “Home of the Brave” (and with a Western world built with risk-taking).

The happiest bank story ever doomed the banks to the unhappiest ending ever.

Sir, I refer to John Kay’s, “When storytelling leads to an unhappy ending”, August 8. 

“The higher perceived risks, the more bank capital, the lower the perceived risk, the less capital.” 

With that so believable regulatory paradigm, bank regulators thought they had saved the world forever from bank crises, not realizing that with it they doomed the banks to the biggest crisis ever. 

That regulation only fed the monster, as risky assets have nothing to do with bank crisis, these all result from safe assets ending up as risky. 

If only bank regulators had drawn up their small including-excluding events probability circles, that could perhaps have stopped them from discriminating in favor of the “not-risky” and against the “risky”. But no! Even 5 years after the explosion, regulators still refuse to do so. 

John Kay, almost all believed in the regulator’s initial narrative, because that is what you do with experts, but please try to explain why do they now still allow utterly failed regulators to keep on regulating, using the same utterly failed narrative? 

And there is a lot of urgency in spreading the narrative about their failure, since that regulation is also castrating the economy at large, as it pushes bank credit toward the currently “safe” and away from the risky-risk-takers who the Western world needs in order to move forward and not stall.