Risk weights of 0% the sovereign and 100% to its source of strength, the citizens, is putting the cart before the horse

Sir, I refer to Professor Lawrence Summers’ “The threat of secular stagnation has not gone away” May 7.

Again, for the umpteenth time: Regulators allow banks to hold less capital against what is perceived safe, like houses and friendly sovereigns, than against what is perceived risky, like entrepreneurs. This allows banks to leverage more with the “safer” present economy than with the “riskier” future. 

And this allows banks to earn higher expected risk adjusted returns on equity when financing the “safer” present economy than when financing the riskier future, something which causes banks to give too much credit to the current economy, without giving sufficient credit to the future productive means that could generate a much needed debt repayment capacity. 

This has to result in the “slow productivity growth [and] unsound lending and asset bubbles with potentially serious implications for medium-term stability” which is of such great concern to Professor Summers. Why is this so hard to understand?

Why can renowned professors with so much voice, not be able to also understand that if you assign a risk weight of 0% to the sovereign, and one of 100% to the citizens, those who signify a sovereign’s prime source of strength, you are putting the cart before the horse? Are they too statist or, behaving like sovereigns with an après nous le déluge, just too indifferent about the future. 

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

@PerKurowski

FT – IMF: Debt should be a growth hormone and not just a hallucinogen or painkiller for the après nous le deluge crowd

Sir, you refer “a financial storm [that] hit the global economy… fuelled by heedless borrowing”, “Stop worrying and learn to live with debt” June 8.

Clearly bank regulators are FT’s protégées. The heedless lending that was fueled by ultralow capital requirements for banks was what caused the financial storm’s excessive borrowings.

And now you praise a recent IMF paper that says “most countries can relax: debt ratios should be allowed to decline “organically” with growth, or through opportunistically pocketing windfalls.”, based on the argument: “Cutting debt requires higher taxes or less public investment, both at the expense of economic efficiency”

Sir, what certain link is there between public investments and economic efficiency? Sir, are there not plenty of public sector spending savings that could be done in order to increase economic efficiency?

Had baby-boomers bit the bullet in 2007-08, and accepted the losses without pushing the can down the road with Tarp, QEs and fiscal deficits, they would have suffered some quite hard times, but the deck would be cleared for the next generation to have a go.

That of course, as long as we got rid regulator’s silly aversion against banks lending to SMEs and entrepreneurs, only because these are perceived as risky, all as if bankers are blind children unable to perceive those risks.

That of course, as long as we got rid of communist or statist regulator’s who with their zero risk weight for government borrowing tell us they believe government bureaucrats can use bank credit more efficiently than a SME or an entrepreneur.

That current generations should relax about the debt, and let it “decline ‘organically’ with growth, or through opportunistically pocketing windfalls (like winning a lottery), in order to remain on easy street, expresses a shameful après nous le deluges attitude.

@PerKurowski

Martin Wolf, current bank regulators show really no interest in your country’s future.

Sir, Martin Wolf writes: “The Scottish Nationalist party does not have an interest in my country’s success. It is interested only in what it can extract from us.” “Long live the United Kingdom — but not at any price” April 17.

But extracting for the benefit of the current generation all it can of what already exists; and by denying the risk taking needed showing no interest in the future, is exactly what current bank regulations do. With their credit-risk weighted equity requirements for banks the regulators have de facto placed a reverse mortgage on the United Kingdom, something that guarantees there will be much less to inherit for its coming generations.

But perhaps Martin Wolf, as a senior citizen, does not mind at all such regulatory risk-aversion… he might rather favor an “Après moi le deluge”.

@PerKurowski

There are credits for building the future and credits for consuming the past. And these must live in harmony.

Sir, Martin Wolf writes “The world desperately needs new ways to manage its economy, ones that support demand without creating unmanageable rises in indebtedness” “How addiction to debt came even to China”, February 25.

Indeed, but to achieve that it is an absolute must to understand that, in order to harvest and consume you need to first finance the sowing.

Currently regulators, by just looking at credit risks, which obviously favors what is already harvested, have with their lower equity requirements, mindlessly tilted bank credit in favor of financing the consumption over the sowing.

Creditworthiness should not only be based on repayment, but should also consider what the credit is to be used for.

In fact, many decades ago bankers used to tell us: “Know your client - What is the credit for? - How do you intend to repay?”

Current regulations have bankers outsourcing the “know your client” to credit rating agencies and caring little about what the credit is for. Nothing good can come of that.

I prefer one and the same equity requirement against all bank assets so as not to distort the allocation. But, if I had to choose, then thinking of those who will come after us, I would allow banks to hold less equity against what builds the future then against what consumes the past.

That way banks would earn their higher risk adjusted returns on equity working for our children and grandchildren, instead of working for us.

But of course, there are also plenty of baby-boomers asking: “Why that? I need or want it now!… après moi le deluge”

Bank regulators have placed a reverse mortgage on our economies that extracts all present value and builds no future.

Sir, Martin Wolf writes about the growth of fiscal spending in health and other “predominantly age-related areas” and about “a conflict between the young and old and between the successful and less so”, “This year’s election will decide the future of the British state” February 20.

It is much worse than that. Regulators, with their equity requirements based on credit risks, de facto ordered banks to function as if they were the portfolio managers of retiree… “Don’t finance the future, that’s too risky… refinance the past, that’s safer.” And that has meant something like placing a reversed mortgage on our economies… extract maximum present value and leave no inheritance to those coming after.

And anyone that thinks that the fiscal deficits of tomorrow could be compensated by higher taxes only… and that if growth is needed then it suffices with governments proceeding with some infrastructure investments has no idea of the workings of the economy.

Those valves that control the flow of bank credit to “risky” SMEs and entrepreneurs are closed shut. They need to be open… as they always were… before my me-and-only-me baby-boomer generation outsourced bank regulations to an après nous le deluge Basel Committee.