Wolfgang Schäuble, bank regulators imposed on Europe (and the world) a very dangerous risk taking austerity

Sir, Guy Chazan quotes Wolfgang Schäuble with: “Economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt. I myself am concerned about this, too”, “Schäuble says debt and liquidity levels endanger global economy” October 9.

If you put a risk-tax on sports, to cover for the societal costs of injuries, like a10 percent tax on cricket and one of 1 percent on croquet, would you not expect the result being many more playing croquet than cricket, with whatever implications that could have for the society in general.

That “accumulation of more and more liquidity and growth of public and private debt”, is made worse by the fact that this is being so distorted by the risk weighted capital requirements for banks; those which de facto are a subsidy to “The Safe” and a tax on “The Risky.

According to Chazan “Mr Schäuble also warned of risks to stability in the eurozone, particularly those posed by bank balance sheets burdened by the post-crisis legacy of nonperforming loans”. To me it is amazing to observe how regulators seem to concern themselves so much more with the ex ante perceived risks. than with the ex post realities.

And then Jim Brunsden Mehreen Khan and Guy Chazan write that though Wolfgang Schäuble “was an architect of the stringent bailout programmes carried out in Greece and elsewhere during the eurozone’s sovereign debt crisis, he insists the goal was never to impose austerity on Europe”, "Schäuble feels vindicatedby tough reforms in bailout nations"

Schäuble, being a German lawyer, could perhaps be personally excused, but all those economists and other technocrats surrounding him should have informed him that those risk-weighted capital requirements were imposing one of the most dangerous kinds of austerity, that of insufficient risk-taking.

“Insufficient risk-taking?” “Have you gone mad Kurowski?” “Have you not seen all the excessive risk-taking that took and is taking place?”

Not at all, it was, and is, excessive exposures to “The Safe”, like to sovereigns, AAArisktocracy and mortgages that caused the crisis. That’s more excessive risk aversion.

It is also insufficient bank credit to “The Risky” like to SMEs and entrepreneurs that allows so much QE and low interest rates stimuli to go to waste.

Sir, I strongly believe that Mr Wolfgang Schäuble would never pass my litmus test for the initial screening of a central banker or a regulator, but then again neither would you.

@PerKurowski

Why do John Kay and his colleagues cover up bank regulators’ prominent role in creating the Greek tragedy?

Sir, John Kay writes: “For every foolish borrower there is usually a foolish lender. The Greek crisis is not simply the result of Athens’ inept public administration but also of an extensive carry trade on eurozone convergence by northern European banks, notably in France and Germany, which obtained short-term profits by matching northern eurozone liabilities with southern eurozone assets.” “What St Luke would say to Schäuble” July 29.

But however foolish bank lender can be, they can be made even more foolish by their regulators. For instance, between June 2004 and November 2009, because of Basel II and Greece’s credit ratings, banks were allowed to leverage their equity, and the support they received by means of deposit guarantees and similar, 62.5 times to 1 when lending to the government of Greece, while being limited to a 12.5 times to 1 when lending to German, French or Greek SMEs or entrepreneurs. 

And John Kay knows that without those regulatory incentives, based on some foolish aversion of credit risk, banks would never ever have lent to Greece as much as they did. And so the question is why does John Kay cover up for the regulators by hushing this up?

And speaking about crazy risk aversion, besides St Luke, John Kay could do well reading St Mathew, 25:14-30.

14 “It will be like a man going on a journey, who called his servants and entrusted his wealth to them. 15 To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability. Then he went on his journey… 

24 “Then the man who had received one bag of gold came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. 25 So I was afraid and went out and hid your gold in the ground. See, here is what belongs to you.’

26 “His master replied, ‘You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? 27 Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest. 28 “‘So take the bag of gold from him and give it to the one who has ten bags. 29 For whoever has will be given more, and they will have abundance. Whoever does not have, even what they have will be taken from them. 30 And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.’

The incentives provided by the Basel Committee, more perceived risk more capital – less perceived risk less capital, clearly instructed the bank servants not to behave according to the Parable of the Talents.

PS. It is clear that the ability to which Mathew 25:15 refers to has nothing to do with the ability of repaying the funds but with growing the funds by putting it to good use. In other words: the efficient allocation of bank credit.

PS. And, from what we read, perhaps Pope Francis would also do well pondering a bit more about that parable.

PS. By the way, should the servant St Matthew refers to, refuse to lend at negative rates?

PS. When John Kay mentions ordoliberalism, I must say that I cannot understand how anyone remotely connected to that economic thinking, could accept the distortions in the allocation of bank credit created by current bank regulations.

@PerKurowski

Does Schäuble know ECB’s Draghi agreed with allowing German banks to leverage over 60 times when lending to Greece?

Sir, Anne-Sylvaine Chassany, James Politi and Peter Spiegel write about “Wolfgang Schäuble, advocating a Greek ‘timeout from the eurozone’ for ‘at least the next five years’ if Athens did not accept the bloc’s exacting conditions for a new bailout”; and of that “Germany puts more onus on stricter rules and control from the centre”. “Fears over German power as Merkel and Schäuble end the good cop, bad cop routine” July 18.

That leads me to question whether Wolfgang Schäuble really knows that rules and control from the centre, in this case by the Basel Committee, allowed German banks, between June 2004 and November 2009, to leverage their capital over 60 times when lending to Greece.

And does Schäuble know that banks in Greece are currently required to hold much less capital when lending to Germany or France, than when lending to Greek SMEs and entrepreneur, so as to help Greece develop the means to be able to at least somewhat serve its monstrous debts?

I ask so because it would seem much more important for Schäuble to request a very long timeout from all ongoing negotiations about the future of Europe, the Eurozone and Greece, of the Basel Committee and of all those who have directly had anything to do with current bank regulations.

And does Schäuble know that Mario Draghi, as a former chair of the Financial Stability Board, is one of those severely compromised bank regulators?

Believing too much in “the power of peace” can be hazardous to the health of your nation.

Sir, I refer to Simon Kuper’s “The surprising power of peace”, March 29.

It is always better to be skeptical and pleasantly surprised by “the power of peace” than naïve and unpleasantly surprised by its weakness. Most Venezuelans, including most of those who strongly protested the previous ways of Venezuela, and thereby perhaps unwittingly helped to open the way for Hugo Chavez, stand today in utter disbelief watching how everything has degenerated. I cannot but reflect on how much better off we could have been if we had believed much much less in “the power of peace”.

And I say this also in reference to George Osborne and Wolfgang Schäuble now recommending a “balanced and proportionate” response to Russia. That sounds a bit like believing too much in “the power of peace”.

On responding to Russia and on Europe’s decline, Churchill and von Bismarck might have differed from Osborne and Schäuble.

Sir George Osborne and Wolfgang Schäuble write about responding to Russia in a “balanced and proportionate way”, “The eurozone cannot dictate Europe´s rules alone” March 28. Is that really enough? Might it not be so that history shows that Europe must respond to Russia in an unbalanced and disproportionate way?

And these two European gentlemen also write that “No one should assume that European decline is inevitable”. No… but it can happen! As long as regulators, with their risk weighted capital requirements allow banks to earn higher risk-adjusted returns on equity when lending to what is perceived as “safe” than when lending to what is perceived as “risky”, its decline is inevitable. In order to have a future Europe must risk continuing opening those risky doors behind which its luck might be hiding.

Sir, do you believe Winston Churchill and Otto von Bismarck would have cosigned George Osborne´ and Wolfgang Schäuble´s article?

No matter what Schäuble-Merkel or Wolf think, Europe will not survive if it does not rid itself of Basel II and III

Sir I refer to Martin Wolf’s “Germany’s strange parallel universe”, September 25.

Bank regulators have based and still base their capital requirements for banks on how borrowers could fail and not, as they should, on how banks could fail, as entities and in allocating credit to the real economy. For instance, instead of observing themselves the credit ratings of any bank borrowers, they should be observing what bankers do when they see those credit ratings.

And so when the Basel Committee regulators introduced risk-weighting into the capital requirements for banks they created huge distortions, which have proven to be not only very dangerous for the safety of the European banks, but which also impedes bank credit to be efficiently allocated in Europe.

And that unpardonable mistake caused the crisis in Europe, and blocks any real European economic recovery, and this no matter what other route Europe takes, be it Schäuble’s and Merkel’s, or one that Martin Wolf could agree with.

Europe go directly to Basel IV!

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.

Down with all corporate taxes, these only dilute the citizen’s tax representation.

Sir, I refer to Mr. George Osborne’s, Mr. Pierre Moscovici’s and Wolfgang Schäuble’s “We are determined that multinationals will not avoidtaxes” February 16, and which unfortunately does not seem to imply that the “smaller businesses paying up to 30 per cent” will now be able to pay the 5 per cent the authors indicate multinational pay. 

Yet all corporate taxes will, no doubt, at the end of the day, one way or another, be paid by a citizen somewhere. And therefore that citizen’s payment will occur without the governments being held accountable to that citizen, allowing instead that citizen’s tax-paying-representation powers to be exercised by the corporations. 

Also, since the final real bill for a corporation’s tax might hit someone earning or having absolutely nothing, these corporate taxes can de facto also be extremely regressive. 

I therefore hope the ensuing discussions and determination of this powerful trio, gets to be oriented toward lowering or better yet eliminating all corporate taxes. Of course, a zero corporate tax would imply that all investment income had to be taxed at the same level as all other income. 

Down with corporate taxes! The only ones who should have the right to cover for a government expenses are the citizens, and that right should not be diluted in any way. 

PS. This is not the moment, but if you have time, I would like to refer you to My Tax Paradise, because nothing is more powerful against sinful tax-havens than a virtuous tax heaven.

The worst austerity is the regulatory risk-taking-austerity imposed on banks.

Sir, Claire Jones and Peter Spiegel report that “German finance minister criticizes Lagarde call to ease up on austerity”, October 12.

Sincerely, it would sure do all those present at the IMF and World Bank Meetings in Tokyo much good to discuss the “austerity” that hurts the most. I refer to that of the risk-taking-austerity which results from current capital requirements for banks based on ex-ante perceived risk.

Those risk-taking austere regulations caused the crisis, by giving banks extraordinary incentives to lend to “The Infallible” and avoid lending to “The Risky”, the small businesses and entrepreneurs. 

And at this moment of extremely scarce capital, those regulations, and now made even worse because of liquidity requirements based on the same perceived risk, are discriminating more than ever against The Risky, and completely locking them out from having access to bank credit in competitive terms.

How on earth do they think we can get out of this economic mess they helped to place us in without the help of “The Risky”?

How to protect EU’s economy against failed bank regulators

Sir, Wolfgang Schäuble’s “How to protect EU taxpayers against bank failures”, August 31, much provokes a “How to protect EU’s economy against failed bank regulators” 

If we are going to have “a truly effective banking supervisor to enforce a robust single rule book on the [banking] sector” then there are some minimum things that need to happen. 

First and foremost, the supervisor needs to be held accountable for what he does, and must always be willing to explain what he considers to be the purpose of the banks, and publicly answer any questions about how his regulations are intend to support the banks achieving it. 

I say this because if the earnings of EU taxpayers are decreased more by bank regulations, than the costs of paying for bank failures, the offered protection would seem somewhat lacking, to say the least. 

And though Schäuble admits that a “supervisor can only be as good as the rules it enforces, he, as most of his colleagues, still shies away from discussing their “light-touch” rules. 

Capital requirements for banks based on perceived risk, and which among others allowed banks to leverage their equity 62.5 to 1 when lending to Greece, but only 12 to 1 when lending to an unrated small business and entrepreneur… is that supposed to be “light-touch”? No, of course not, and it was really the regulators, playing risk-managers for the world, who, as I see it, caused the current crisis. 

Schäuble also writes “Four years and much regulatory work later, financial markets have become a safer place”… What? Is he running for any election? As far as I can see they have not even begun the needed reforms, to make the banks and the economy safer and more functional, as that requires first, of course, to understand and to acknowledge the mistakes they did. 

Amazingly it seems the regulators still believe it was all mostly the fault of lousy credit rating agencies and banker’s bonuses. And so sadly, their ingrained faulty risk-aversion, is still guaranteeing the dangerous overpopulation of any safe-haven, and that our banks will still keep away from lending to the “risky”, like to our small businesses and entrepreneurs.