Does not common sense dictate that in good times we want our banks to be weary about what they perceive as safe? Does not what’s seen as risky take care of itself?

Joe Rennison writes: “Investors and rating agencies have warned that companies might struggle to refinance huge debt burdens, resulting in downgrades from triple B into high yield or “junk” territory.” “BIS sounds alarm on risk of corporate debt fire sale” March 6.

What does that mean? Namely the risk that ex ante perceptions of risk might, ex post, turn out really wrong.

Also, “Bond fund managers could then have to sell the bonds as many are bound by investment mandates barring them from holding large amounts of debt rated below investment grade. ‘Rating-based investment mandates can lead to fire sales,’ warned Sirio Aramonte and Egemen Eren, economists, in the BIS quarterly review released yesterday.”

And what does that mean? Clearly procyclicality in full swing! Just like the insane procyclicality caused by the risk weighted capital requirements for banks.

Sir, does not common sense tell you that in good times we want our banks to be weary about what they perceive as safe, as what they perceive as risky takes care of itself? And in bad times, do we not want our banks not to be too weary of the risky, and burdened with having to raise extra capital when it could be the hardest for them?

Sir, so what are regulators doing allowing banks to hold less capital against what they in good times might wrongly perceive as safe, and imposing higher capital on what they would anyhow want to stay away from, especially in bad times?

Sir, for literally the 2,781 time, why does not the Financial Times want to dig deeper into unavailing what must be the greatest regulatory mistake ever? 

Are you scared of then not being invited to BIS’s Basel Committee’s and central banks’ conferences? “Without fear and without favour” Frankly!

@PerKurowski

These are the houses that Jack built, baby, and their prices reaches up into the sky

Sir, I refer to Merryn Somerset Webb’s “UK property: The recent gains could turn out to be a huge historical anomaly” House and Home, November 17.

I would argue that more than an anomaly we are living the results of a humanly understandable political mistake of historical proportions, namely that of trying to make houses affordable by means of many preferential conditions.

After society, God knows why, decided that a home owned was much more valuable than a home rented, many different favors were awarded the purchasing of houses, many like those Somerset Webb describes, but also some other much harder to detect.

For instance, regulators decided that since they perceived residential mortgages as very safe, banks would be allowed to hold comparatively little capital against these. Since banks could therefore leverage much more with residential mortgages than with many other assets, banks had higher incentives to give a house buyer, who otherwise would not be able to buy a house, an easy credit.

That easy credit to the first buyer increased the demand of houses, so houses prices in general went up; and so the next time when a second buyer also wanted help to afford the house, you had to supply him with even more easy credit than what you helped the first buyer with… and so up and up and up it goes…

And those who own houses benefit and feel enriched by the increase in the price of houses are happy, while those who have not been able to jump on that bandwagon feel more and more frustrated, because the see their dream of a “real” home being made less and less affordable. That is of course something that the redistribution and polarization profiteers try to capitalize on.

And parents, so as to get their children out of the basement, now have to use their house to obtain the finance needed in order to help their children to make the down payments on the houses they want to buy. The sad story is that if banks had not invested so much in “safe” residential mortgages and had perhaps invested more in loans to entrepreneurs who could give them jobs, the children would have been able to afford, on their own, the lower priced houses. 

And so houses morphed from being only homes into also being investment assets. How much of current high house price is represented by the home value and how much by the easy credit value is anyone’s guess, but it sure would be interesting to see how much of their prices.

Whatever, the moment all those investment assets are to be cashed in by too many at the same time, for instance to cover some retirement costs, it will be ugly, for house owners, and for the banks, and for the taxman who has also been so much financed by the house bubble, in fact it will be ugly for all.

It all makes me remember Alan Price’s “Oh my, my, my, my, my, my, my, it makes you wanna cry. This is the house that Jack built, baby, and it reaches up into the sky”

These were the houses that Jack built... with plenty of easy credit, and which were taxed by the taxman

@PerKurowski

Current central bankers are just as lost as Greenspan and friends were lost before 2008, for exactly the same reason

Sir, Sebastian Mallaby when discussing the “alarming froth” in asset prices like shares, bonds and houses, due to “extraordinarily loose monetary policy”, but yet producing “low growth and low inflation” writes: “A … troubling echo concerns the role of regulation. If financiers seem to be taking too much risk, today’s doctrine holds that regulation should restrain them.” “Bubbly finance and low inflation cause alarm” October 8.

NO! NO! NO! Today’s regulations hold that banks should be taking on too much safety. Banks are not allowed to build up dangerous exposures to what is perceived as “risky”, like for example the below BB- rated, which has been assigned a risk weight of 150%; but banks are sure allowed to leverage immensely their capital, and the support they receive from society, with assets rated AAA to AA, risk weighted a mere 20%.

And, if the banks are big and “sophisticated” enough, then they are even allowed to use their own risk models even if, by definition, banks are always interested in minimizing their capital requirements so as to allow them to maximize their expected returns on equity.

There must be something in the air that stops expert central bankers from reaching out to their inner common sense and be able to understand how loony current bank regulations are.

The risk-weighting completely distort the allocation of bank credit to the real economy, making banks ignore their vital role in financing the “riskier” future, and having them to concentrate solely in refinancing the “safer” past. That dooms the world to gloom and doom or as they prefer to call it, to secular stagnation.

And all for nothing! Major bank crises never ever result from excessive exposures to what is ex ante perceived as risky; these always result from unexpected events or from excessive exposures to what was ex ante erroneously thought to be very safe.

@PerKurowski ©

The problem is that regulators, behind our backs, empowered an AAArisktocracy to have special access to bank credit.

If we tax and redistribute all wealth, what shall we do the morning after the party? That question, which could be asked to Piketty, is similar in nature to the question we could make to John Plender, “The corporate aristocracy holding out against fiscal revolution” March 3.

Mr. Plender After getting rid of all that corporate cash by paying dividends, by paying taxes or by building private bridges to nowhere, then what?

Also, all that cash is not just forgotten cash lying under a mattress. Plender himself even mentions that “the corporate sector… in several big economies… now acts as a net lender to governments” which means, that the government already uses those funds, perhaps even paying negative interest rates on these.

Current regulations do not allow bank credit to flow in a fair way to those “smaller companies, which innovate and create jobs”, only because they are perceived as “risky”. That is why the liquidity coming from QEs is trapped, and blows bubbles around already existing assets. But Plender, like many others, just does not want to see this…I wonder why?

What “corporate aristocracy”, what we have is an AAArisktocracy that has been appointed by regulators as those who really merit bank credit.

PS. I have for many years argued that when corporations pay taxes, they dilute the citizens’ tax representation. And that is why when Plender writes that in the US corporate taxes were down to 1.6 percent by 2013, my first impulse would be, bring it down to zero now and save yourselves a lot of expensive economic and political distortions.

PS. Also, as a shareholder, in these times of possible extreme volatility, I do not like to hold shares in any company that has not hoarded ample reserves of cash… to fend off threats or to capitalize on opportunities