President Trump seems to be on route to become one of the greatest “paga-peos” (scapegoats) in history.

Sir, Gillian Tett writes that for her “money, there is another, darker, way to interpret this week’s [extreme volatility in US equity markets]. Two years into Mr Trump’s presidency, global investors are questioning the administration’s financial credibility…Steel yourself to cope with further turbulence triggered by Mr Trump”,“Expect more turbulence from Trump’s Fed fight”, December 28.

Indeed, president Trump is to be blamed for some of it, but the truth is that had the markets been more normal, not so much bubbled-up, he would only cause some ripples never Tsunamis.

That Trump has given indications to fire Jay Powell, the Fed chair, is bad in as far as it interferes with the necessary independence and credibility of a central bank. But, that said, let me also hold that, if a central banker or a regulator believes that what bankers perceive as risky is more dangerous to bank systems than what they perceive safe, and therefore use credit distorting risk weighted bank capital requirements, as they’ve done for a long time, that is a clear justified cause for their removal.

Venezuelan historians sometimes recount that in old days the refined ladies of the society always used to keep a young slave close by. Whenever they let out noisy and smelly gases, they would hit the slave hard and loudly on his head spelling out “Boy/Girl!” whichever applied. These useful blame-takers, scapegoats, were known as “paga-peos”, literally “fart-payers”.

Sir, President Trump clearly produces some gases himself, but he could also go down in history as one of the greatest paga-peos ever.

When booming equity markets, house prices and unsustainable debt levels everywhere, built up with easy bank credit, huge liquidity injections and ultra-low interest rates come crashing down, as they must, sooner or later, those who are much more to blame for it, could all jointly point at President Trump and shout “He did it!” and Ms. Tett might smilingly nod in agreement.

PS. Though in Spanish here you will find more interesting details about the “paga-peos” tradition and about how it can be used with even worse intentions.

@PerKurowski

Why does John Authers keep mum on how low capital requirements for banks on house financing helps to inflate the bubble?

Sir last Thursday was the 10th anniversary of the G10 approving the absolutely senseless Basel II bank regulations. And here we are and still one of your star columnists, John Authers writes about the need to prevent bubbles, in this case a bubble in the value of UK housing sector… and does not even mention the role that preferential bank capital requirements can have in inflating a bubble, “Rate rises pose biggest test for BoE bubble theory” June 28.

The risk-weight on a residential mortgage is 35%, while the risk weight for a loan to an SME or an entrepreneur is 100%. And so a bank can leverage its capital about 20 times more when financing the purchase of a house, than when giving business those loans that could create the jobs that could help home buyers to pay their mortgage and their utilities.

And I am sure John Authers must understand that this helps to inflate the house bubble, and so that we could at least expect that if BoE perceived the risk of a bubble, it would increase the risk-weight for new mortgages, before toying around with other tools… but yet Authers chooses to keep mum about all that … why?

When spotting bubbles, make sure you look at the right one!

Sir Kenneth Rogoff writes “Spotting the tell-tale signs of bubbles approaching” April 8, but ignores the risk of looking at the wrong bubble. Take the so called real estate bubble in the US for example.

If the triple-A credit ratings on the securities collateralized with the subprime mortgages had been correctly awarded, then the increase in the prices of the houses would perhaps not have occurred or, if they did, those prices could have reflected a reality of supply and demand and not a bubble. This is so because the real bubble we had was a mega bubble of unjustified trust in the credit rating agencies; and which started when the bank regulators foolishly and trustingly outsourced the risk watching to these agencies to such an extent that they allowed the banks to hold only a meagre1.6 percent capital if the rating was a triple-A.

I dare you to think about the horrors of a world with no bubbles.

Sir Frederic Mishkin wrote “Not all bubbles present a risk to the economy” November 11. I go one step further and hold that it is the absence of bubbles that would drive the economy into the ground, in just a few decades, and that what most drives the economy forward is precisely the probability of finding yourself a nice little bubble to float up on.

I dare you at FT to think about the horrors which a world with no bubbles would imply. Ah you want controlled bubbles? Are you going to use bubble rating agencies for that? Good luck! What I want are financial regulations that do not discriminate against risk and that are willing to risk the bubbles instead of embracing the certainty of staying on ground or even underground.

I do not want the regulators worry so much about the crisis, but instead worry about how to increase our possibilities that the bubbles takes us somewhere we want to go.

Is there no cost in avoiding bubbles?

Sir though I agree with much of Martin Wolf’s “How mistaken ideas helped to bring the economy down” October 28, I have serious difficulties on understanding how one should be implementing the bubble-busting. Are the regulators now going to appoint bubble-measurers? Are we going to have these assets bubble-meters being showed off in Times Square?

Much the same way it sounded so utterly reasonable to have the credit rating agencies influence how much equity banks should have, and look where it led us, this reasoning assumes that a bubble is a bubble and that there are no risks derived from pre-announcing that a bubble will not happen. And what if the prime motor of development is the belief in the possibilities of the next bubble? If we eliminate ex-ante the possibility of a bubble will some then just stay in bed while other countries with no qualms about crisis go forward?

If there is something truly lacking in the current discussion on regulatory reform is the appreciation of the good things that come with risk-taking and now, the good things that come from bubbles.

Me, I would love the world to keep on taking risks- and blowing bubbles even at the cost of suffering huge setbacks as long as that takes us forward. Because of this, more than worrying about where the next precipice might be, I would try to make much more certain we are heading in the right direction. Others, on the contrary, seem to be satisfied with what they have achieved and settle for keeping it.

Balloons explode, don’t they?

It is amazing that so soon after having witnessed what disasters comes from having empowered credit agencies to put up their AAA signs showing the roads to no risk-lands Arvind Subramanian and John Williamson dare to recommend setting up zones for asset prices. “Dear I don’t think we should buy our house here because it has a 343 bubble rating. Perhaps I should look for a job in Toledo?”, “Put the puritans in charge of the punchbowl”, February 12.

There is nothing wrong for a central banker to keep an eye on assets prices such as houses to decide on monetary policies but if he wants to make any official use of it he should first make sure he does not own a house so as to be free of any conflict of interest but, more importantly, he needs to remember that bubbles, even though they might hurt when they explode, have a role to play in taking human and economic development forward.

A world without bubbles gets to be closer to a world without illusions.

Should central bankers be allowed to own assets?

Sir in reference to your leader "The great asset price controversy" May 15 one could wonder if the first step should not be that of prohibiting central bankers from owning assets as one must wonder how many, if not all of them, were plainly delighted seeing the value of their houses go up and up... like a beautiful balloon full of hot air.

Take away some of the incentives for consumer lending

Sir, January 8, Stephen Roach argues that “America’s inflated asset price must fall” in order “to shift the mix of savings away from asset appreciation back to that supported by income generation” and which sounds desperately drastic when there are other means to do that.

Anyone who lives in the US and receives ten pre-approved credit card offers each week and still, six months into a crisis, has to answer five phone calls a day offering mortgages, must know that some other forces than asset prices must be driving debt creation.

Since so many seem capable to so easily switch from praising the US for being the locomotive of world growth to “being the main culprit behind the destabilizing global imbalances” let me at least point out what I think is also responsible for the current sad state of affairs.

The securitization of consumer debt which allowed the creation of low risk financial instruments, plus the introduction of the minimum capital requirements for the banks and which are exclusively based on risks, as perceived by the credit rating agencies, constituted a massive dose of incentives for the financial system to go after the consumers, in the US and everywhere. Taking away some of the incentives to offer unreasonable consumer credits might long term be a much wiser thing to do for a nation than having the price of their assets fall from the skies.

It’s not just abiut the targets but also about how you throw the darts

Sir, Paul de Grauwe opines that “Central banks should prick asset bubbles”, November 2, and though that might be right in terms of monetary policies, whether the central banks throw their darts at inflation targets or assets bubbles, does not excuse them from acting with wisdom when regulating the banks.

When the regulators imposed their minimum capital requirements on the banks based exclusively on risk assessments performed by their commissars or Blackstone type subcontractors, the credit rating agencies, they should have known a reaction would follow. First that many assets deemed more risky by the banks than what the appraisers thought them to be, would probably stay in their balance sheets while all those assets deemed less risky than appraised, would find new balance sheets where to hide out .

Second that the credit rating agencies would turn into the mother of all the systemic risk builders and contagion agents allowing profitable arbitration in risks, mostly through securitization mechanisms. Let us remember that all this subprime mortgages mess would have had no chance of going global, had it not been for the banks being able to sell the mortgages because the credit rating agencies provide these with AAA travelling documents.

The information Mr Market receives could also be neurotic

Published in FT, Friday May 26, 2006

Sir, Martin Wolf’s very interesting although not quite sure where-it-finally-leads-you article “Neurotic Mr Market has plenty to be anxious about” (May 24), bases itself on an argument made by William White, in a working paper of the Bank for International Settlements (BIS), that there is something intrinsically destabilising derived from stabilising inflation.

I would argue instead that it is solely the way how inflation is measured that creates the confusion.

Let us not forget that inflation as they, our monetary authorities, know it, is just obtained by looking at a basket of limited consumer goods chosen by bureaucrats and that although they might be highly relevant to the many have-nots, are highly irrelevant to measure the real loss of value of money.

For instance, who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.

PS. August 2020: Inflation has already returned