How much safe sound private money can we really have before it really becomes just too dangerous?

Sir, Paul McCulley writes “The crisis of the past decade was a reminder of the instability inherent in private money”, as if public money is inherently stable, “Make shadow banks safe and private money sound” June 17.

Also, as I see it, the number one reason private money turned unstable, was precisely the efforts of regulators to make it safe… as they concocted those senseless capital requirements for banks based on perceived risks, and which only guaranteed that when a bank crisis resulted from excessive exposures to what was perceived as absolutely safe, as all bank crisis do, the banks would then be standing there with their defenses, their capital, at a very low.

No Mr. McCulley, you at Pimco might have a vested interest in it, but I guarantee you that we, the rest, have no wish for Easterly’s tyrant experts to make our private money too safe… that is just too dangerous.

FT Do you suggest we leave it all in hands of an Easterly type tyranny of “experts” in thinking machines morality?

Sir, so you want some morality experts to begin thinking about “the morality of thinking machines”? June 16.

The same type of experts that came up with those utterly immoral (and stupid) capital requirements for banks based on perceived risks which discriminate against those already discriminated and favors those already favored?

The same morality possessed by those willing to finance any human rights violator around the world, as long as the risk premium is right?

No thanks the way it looks some of us might prefer betting on artificial intelligence coming up with its own morality… because at least it would most probably not be so dumb so as to think that bank crises arise from excessive much exposures to the ex ante risky.

At least I would not like to leave this in the hands of an Easterly type tyranny, of experts in thinking machines morality.

PS. Is it moral for FT to cover up the stupidity of experts?

What can an insignificant ego like mine, even if absolutely right, do against significant egos, even when these are absolutely wrong?

What is perceived as risky never constitutes much real risk. What most drives a financial doomsday machine is what is perceived as absolutely safe; which is why risk-weighted capital requirements for banks based on perceived risks, which favors bank lending to “the infallible” is so absolutely dumb.

But unfortunately that seems too difficult to comprehend, for instance by Martin Wolf.

When he now begs for to “Disarm our doomsday machine” May 28, Wolf still shows no sign of having understood how dangerous the pillar of our current bank regulations really is. Why do I say so?

Wolf quotes Timothy Geithner saying “The safer the visible financial system is made, the greater the danger that the fragility will emerge somewhere less visible”, and connects that to the need of “preventing such obvious absurdities as the build-up of huge off-balance sheet positions in vital institutions. And though that might have some truth to it, the real fact is that currently it is the visible financial system that has been made dangerous, by trying to make it safe. For instance look at hedge funds and you will see that they never ever can achieve leverages similar to those authorized banks to have by regulators, if keeping to the “absolutely safe”.

No the best way to “disarm our doomsday machine” is to get rid of the distortions produced by risk-weighting, and to follow the simple rule of not procrastinating, meaning solving the problems while they are still small.

In May 2003, as an Executive Director of the World Bank I told bank regulators gathered to discuss Basel II “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 though I am still not a regulator I still stand by that.

Mr. Martin Wolf. Currently we still have regulations which guarantee banks holding especially little capital when what is especially dangerous, one of “the infallible”, blows up. Disarm that AAA-bomb! Capisce?

The fact is that big egos can be just as dangerous as the tyranny of William Easterly’s experts.

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.

When restructuring the World Bank you might want to start even higher than its presidency.

Sir, I refer to your editorial “Restructuring hell at the World Bank”, April 10.

You end it stating “If there is a silver lining to the bank’s turmoil, it is this: the Bretton Woods Institutions belong to the world. From now on, they must be headed by the best people available”

Not so fast! When presenting my book Voice and Noise, May 2006, in which I reflected on my experiences as an Executive Director of the World Bank, 2002-2004 this is what I said:

“Although we proudly name ourselves the World Bank, the fact is that we are more of a “Pieces of the World Bank”, with 24 Executive Director representing parochial interests. As a consequence I sadly had to conclude in that the World itself, call it Mother earth if you want, in these times of globalization, is in fact the Bank’s most underrepresented constituency.

This needs to be fixed, urgently, as we need to be able to stimulate a profoundly shared ownership for the long-term needs of our planet; that is if we want to survive as a truly civilized society worthy of the term civilization. As I see it, adding a couple of truly independent seven-year-term Executive Directors, whose role would be to think about the world of our grandchildren, way beyond the 2015 of the Millennium Development Goals—could be what the World Bank most needs now.”

And Sir, I still stand by that. 

The way the World Bank’s Executive Directors are nominated by ministries, does not guarantee the existence of sufficient intellectual and independent diversity at the Board. And that is the number one condition that needs to be satisfied in order for any international finance institution, to become something more than a well intended mutual admiration club, run by an also well intended management in natural pursuit of their own and perhaps even more parochial objectives.

PS. I have been asked by a representative of the civil society, whatever that now means, to add some additional straight to the point explanations of what I mean, and so here it is:

1. I guarantee that if one Joe the Plumber or one Nancy the Nurse, selected through lottery from 25 plumbers or 25 nurses, substituted for one of the 25 current executive directors, chosen also by lottery, we would have a 75% chance of ending up with a more commonsense and wise Board of Executive Directors at the World Bank, and less than a 1% chance to end up with something meaningfully worse.

2. If the Basel Committee for Banking Supervision (or perhaps the IMF) had counted with one biologist or an expert in the contagion of diseases, they would never ever have introduced something as dumb as the risk-weighted capital requirements for banks which, besides distorting the allocation of bank credit, amplify dramatically the consequences of any insufficient or any excessive ex ante perception of risk. And the world would have been saved from the current crisis. The ongoing intellectual incest is so bad that even 7 years after the outburst of the crisis they still do not realize what they have done.”

3. With reference to William Easterly’s 'The tyranny of experts', the real nightmare is to be in the hands of a group of similar experts on the same subject.

4. One of the best ways to control for the dangers of group-think, is to subject the group to the authority of some who is guaranteed not to belong to the group, and has no reason for wanting to belong to the group.

PS. Whenever you click on to social media, say this little prayer: “Please God, save me from becoming a victim of intellectual incest”

Let us also free the development experts!

Sir William Easterly, himself a development expert, after reading the report of the World Bank Growth Commission, tells us to trust the people, instead of development experts, “Trust the development experts – all 7bn of them” May 29.

Easterly bases his conclusions on Friedrich Hayek’s teachings on the need of freedom for “multitudinous individuals to figure out their own answers” arguing that experts cannot impose this freedom from the top down. He is right but having, as a former Executive Director of the World Bank 2002-2004, witnessed myself how the risk aversion of those who manage the business of development; the vested interest of those who hire the development experts, the governments; and the experts own often non functional peer reviews all conspire against creativity and promotes useless development jargon, we should not forget that the experts are also in need of much more freedom.