Is the Eurozone intent on once again give Greece's government a much lower risk weight than that assigned to a Greek entreprenuer?

Sir, Jim Brunsden writes: “Eurozone finance ministers are poised to give Greece debt relief —The plan is to help convince investors that Greece is ready to return to markets when its bailout programme expires in August.” “Creditors set to reach agreement over Athens debt deal” June 21.

That sure does sounds scary if the “convincing of the investors” once again includes giving the Greek government, for the purpose of the capital requirements of banks, a lower risk weight than it merits. That would be sheer cruelty.

Let us never forget (though the statists have classified it as something that should not be named) that it was the insane 0% risk weight assigned to Greece by European central bankers that got that country into its so tragic difficulties.

In my opinion the Greeks (or at least Yanis Varoufakis) should have taken those central bankers to the European Court of Justice long time ago. Imagine what would have happened to a credit-rating agency had it assigned such 0% risk weight to Greece?

https://subprimeregulations.blogspot.com/2011/11/who-did-eurozone-in.html

@PerKurowski

To make banks safer, stop allowing besserwisser regulators distort the allocation of credit.

Sir, Martin Wolf writes: “147 individual national banking crises occurred between 1970 and 2011. These crises … were colossally expensive, in terms of lost output, increased public debt and, not least, political credibility” “Why the Swiss should vote for ‘Vollgeld’” June 7.

Sir, in the years before those crises, did the economy grow in the same way? No one seems to be interested in the quality of the booms, as they are all too fixated on the damages of the busts. John Kenneth Galbraith, in his “ Money: Whence it came, where it went” (1975) wrote: “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

Wolf writes: “it is often easiest for banks to justify lending more just when they should lend less, because lending creates credit booms and asset-price bubbles, notably in property.” But Wolf, probably being one of those “insiders” Yanis Varoufakis refers to in his “Adults in the room”, refuses to point out how regulators, by allowing banks to leverage much more with “safe” residential mortgages, than for instance with loans to “risky” entrepreneurs, helped feed the property bubble.

The regulators, when interfering with their capital requirements for banks based on the ex ante perceived risks that would usually be cleared for solely by the market, obfuscate market signals, and thereby distort the allocation of bank credit making the economy weaker and the bank system riskier… and there is no way around that! 

PS. Does an ordinary British citizen know, for instance, that their bank regulators allows banks to hold much less capital against loans to Germany than against loans to British entrepreneurs? Sir, don’t you think they have a right to know that? Or is it a case of the risk-weights that shall not be named?

@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

Less trust in the Greek government has a great silver lining we can only hope lasts long enough.

Sir, Peter Spiegel writes: “Trust is so broken several eurozone officials say even if Greeks defy Mr Tsipras and vote Yes tomorrow, they may be unwilling to deal with his government to negotiate a new bailout.” “Trust evaporates after bewildering week” July 4.

Between June 2004 and November 2009, with Basel II, the regulators in the Basel Committee allowed banks to lend to the Government of Greece against only 1.6 percent in capital, which implies an authorized leverage of over 60 to 1 when lending to Greece… and if that is not an outrageously excessive trust what is?

And since banks were required to hold more capital when lending to the Greek private sector that also implied regulators believed Greek government bureaucrats could use bank credit more efficiently than the private sector… and if that is not complete lunacy what is?

The excessive trusting of Greek governments caused the current tragedy… and so less trust in its government cannot really be too bad. Let us hope that distrust lasts long enough for the Greek citizens to have a chance to rebuild their own country.

That said, the citizens of all other countries must also beware when Basel Committee brings gifts to their own government bureaucrats.

The hard left in Greece should shut up. Unless absolute fools, it was communist bank regulators who took Greece down.

Sir, Gideon Rachman, as one of the possible games Greeks are playing writes: “Syriza is a coalition party and the hard left of the party is likely to split off if Mr Tsipras is seen to accept austerity in return for a new agreement with Greece’s creditors”, “Four games the Greeks may be playing” June 16.

Bank regulators have decided that banks need to hold absolute minimum capital when lending to governments (or sovereigns as these like to be called) when compared to what they are required to hold when lending to for instance SMEs. With that they allow banks to earn much higher risk adjusted returns on equity when lending to governments than when lending to the other deemed risky.

And with that regulators set up the trap that guaranteed that governments would, sooner or later, become over-indebted… and one of the first one to fall hard in that trap was Greece.

Since those capital requirements also imply that regulators believe that government bureaucrats can use bank credit more efficiently than for instance the SMEs, this has to mean that the regulators are either absolutely foolish statist technocrats… or hardline communists.

And so, if I was Mr Tsipras, I would be very careful about furthering relations with the hard left… who knows what other tragedies might come out of it.

Sir, whether current bank regulators are fools or communists, Greece, and the Western World at large, need to get rid of them... urgently.

@PerKurowski