Good intentions are not sufficient. Regulators, wanting to do good by making our banks safer, messed it up completely for us.

Sir, Gillian Tett writes a “survey by US Trust shows that three-quarters of millennials put a high priority on social goals when they invest; that is a stark contrast to baby-boomers, where the proportion was only a third.” “Making money and doing good” December 15.

“US millennials are slated to inherit around $12tn of assets in the next decade or two”

In Wikipedia, on millennials we read: “The Great Recession has had a major impact on this generation because it has caused historically high levels of unemployment among young people, and has led to speculation about possible long-term economic and social damage to this generation.

That great recession was caused by the financial crisis 2007-08, and that crisis was the result of well-intentioned regulators wanting to keep banks away from the “risky” allowed banks to leverage immensely with the “safe”. And so banks created excessive exposures to AAA rated securities, residential mortgages and sovereigns like Greece, which all blew up.

And if millennials understood how their future older age could be so much more difficult than their current elders, precisely because good intentioned risk-aversion have kept banks away from financing the risks needed in order to build their future, they would give less priority than baby-boomers to good intentions and consequentially by slightly more skeptical about investing in social goals.

A Ford Foundation has all the right in the world to pursue its goal as they feel fit, but it should not forget that the world is full of good intentions gone wrong.

Tett mentions that “one of Ford’s first projects, for example, will be to invest in affordable housing in Detroit and Newark; the idea (or hope) is that this will provide measurable returns and statistics about home formation”. I hope Ford, before that, analyzes well the prospects of getting jobs there because, much more important than giving someone an affordable home, is to help that someone to afford a home.

Basel Committee’s standardized risk weights of 35% for residential mortgages and 100% for loans to entrepreneurs just guarantees that so many more of the millennials will end up living in the basements of their parent houses… and if reverse mortgages keep on increasing, then without even the hope of inheriting the houses… severely reducing the expectations of “US millennials are slated to inherit around $12tn of assets in the next decade or two”

Sir, the real value of an inheritance only shows up at the moment of the inheritance… something that too many Venezuelan’s that inherited assets there can attest to.

Here is an alternative doing good proposal for the Ford Foundation. Capitalize a bank to hold 15% against all assets, except for loans that have great job creation or green ratings for which only 10% of capital is needed, and then pressure the management to obtain high returns on equity. That is taking risks with a purpose, that could somewhat help to neutralize the distortions produced in the allocation of credit to the real economy by the current risk weighting… and that is something definitely good…I think… though of course even I could also be wrong.

@PerKurowski

When the young get hold of what bank regulators are doing to their future, they will revolt… Ättestupa?

Sir, Ferdinando Giugliano writes about an “unholy alliance in support of the elderly” that expresses itself in “sparing pensioners and older workers from the cuts their governments need to make as they seek to reduce their budget deficits.” “Left and right across the bloc unite to protect pensioners” June 26.

He states: “many pension systems will pose a rising burden on government spending. But since the age of the median voter will also rise, it will become more tempting to penalise younger workers — for example by raising taxes and social security contributions — rather than cut pension benefits…reducing the incentive to work and, as a result, lowering growth. This would undermine the stability of the very pension systems they vow to protect.”

That is correct, but it is even worse than that. In essence, by means of the credit-risk weighted capital requirements for banks, regulators have imposed on banks investment/lending criteria much more appropriate for pensioners with few years life expectancies, than for the young who need much more risk-taking in order to have a chance to obtain jobs and be able to enjoy reasonably good retirements.

It is all so unsustainable. There is no way that when the young finally understand the hurt that is being done to them, that they will not revolt… and then perhaps suggest to us the reinstatement of “Ättestupa”

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

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.

Martin Wolf, sincerely, what is riskier, that some banks fail or that the planet fails?

Sir, Martin Wolf, as he should be, is clearly concerned with climate change, and states the report “Risky Business” to be valuable in “that it sets this out rightly as a problem in risk management”, “Climate skeptics are losing their grip”, July 9.

Absolutely, and since Wolf so often mentions he formed part of a commission reviewing bank regulations I just wonder why he there did not take the opportunity to then ask for lower bank capital requirements when financing something that could prove to be useful against climate change (sustainability ratings), instead of so purposeless and even so dangerous allowing banks to hold less bank capital against those perceived credit risks they already clear for.

But I guess that Wolf, as a baby-boomer, is more worried about the very short term health of the banks than about the planet… just as he does not seem to worry about the long term prospects of employment of our youth, since had that been the case, he would also have asked about lower capital requirements for banks depending on potential of job creation ratings. Clearly an “après nous, le Déluge…or le dryspell” reigns.

PS. Sir, since this has to do with capital requirements for banks, and Wolf has asked me in no uncertain terms not to send him more comments on it, as he knows all there is about that subject, I leave it in your hands whether to forward this letter to him or not.

Did the baby-boomers’ parents’ not take risks, or use reverse mortgages in order to extract everything for themselves?

Sir, Janan Ganesh writes “Bad luck, not policy, is the scourge of the young” January 7. What is this? I’ve seen a photo of him in FT, and so is he here just working for the baby-boomer establishment?

Of course “There is no law of the universe that says each generation most be more prosperous than the last”, but that should not diminish one iota the moral obligation of each generation from trying that to be so.

Currently grey-haired bank regulators base the capital requirement for banks which should take care of the unexpected losses, on the perceptions of expected losses. And with that they have introduced a distortion that guarantees banks will finance mostly what is perceived “safer”, like the known past, and keep out from what is perceived “risky”, like the future.

And does that mean that the young will at least inherit a safer banking sector? Of course not! The risk-weights which determine the capital requirements are portfolio invariant. That means these do not take account of the added risks of asset concentrations, or the dissipation of risks by means of asset diversification. And that means that the risk of the banking system might be increasing exponentially, even while it is being reported as safer.

Yes “Baby boomers enjoyed almost miraculously circumstances” but, to attribute that to luck and not to the daring risk-taking of previous generations is ungrateful, to say the least.

Just look at the financial products offered to baby-boomers. “Reverse mortgages” which allow parents to extract all equity possible from their houses, for their own consumption, and thereby leaving much less for their heirs. Did the baby-boomers’ parents do such things?

If the young would only look up from their virtual world, and react to what is happening in reality, then Paris of May 1968 might just seem in comparison to have been just another hip peaceful gathering of premature baby-boomers.

PS. There is not a day in which I do not thank all my antecessors for all their risk-taking, and not a day I do not fret I am not capable of taking enough risks for my successors.

God make us daring!

The Help to Buy scheme, has also something of a Help to Sell Expensively flair about it.

Sir, Janan Ganesh opines that “Britain’s flawed Help to Buy scheme is smart politics”, November 12. And this because it allows the Tories, to “connect with the many young to middle age voters priced out of the housing market”.

Yeah, yeah, that is as long as no one informs those many young to middle age voters that they are priced out of the housing market, precisely because of this type of assistance.

Was the government not helping or hindering with permits the housing market in any way, houses could actually be quite affordable. As is, it looks more like a diabolical design to help aging baby boomers get rid of assets, at great prices, sticking those to the generations after them.

Damn you, you so risk adverse, baby boomer bank regulators

Sir, Satyajit Das, states clearly the fact that, if things go on the same, “Over time, financing will become concentrated in official agencies, the ECB and national governments or central banks. Risks will shift from the peripheral countries to the core of the eurozone, especially Germany and France”, “Debt crisis has left German economy vulnerable” November 5.

Of course, how could it be otherwise, with bank capital requirements that so much favor banks going to the “safe harbors”?

Unfortunately, what Satyajit Das, and the Financial Times, do not get is that the greatest cost of it all, for the eurozone and for the whole Western world, is all that adventurous, quite risky, but potentially extremely productive bays that were not explored, only because of such regulations, produced by such risk adverse bank regulators... and who only concern themselves with banks and not one iota with the real economy.

On the Battle between “Austerians” and “Profligarians”

Sir, Martin Wolf refers sort of contemptuously to “austerians”, to whom he holds “a financial crisis is a mark of moral turpitude, to be redeemed only by suffering. “Why the Baltic states are no model” May 1.

But Wolf himself could also with moral turpitude equally be accused of being a “profligarian” in holding that a financial crisis should only be redeemed by just letting the party go on… in the best style of an Après moi, le déluge baby-boomer’s perspective.

Before the worst type of austerity is eliminated, namely that which hinders banks to take the real risks the real economy demands, I find myself definitely to be an “austerian”, because otherwise fiscal and monetary profligacy would just be a waste of fiscal and monetary space.

Now, once the regulatory establishment has come to its senses, God willing, and eliminated the current capital requirements for banks based on risk-weighting for perceived risks which have already been weighted, by means interest rates, amounts of exposure and other terms, then I will gladly think of joining the camp of the profligarians. I said “think” because I would need to be sure regulators really understood how dumb they had been, so as to never again repeat similar nonsense.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has told me not to send him anything more about the implications of these “capital requirements for banks based on perceived risk”… he already knows it all... at least so he thinks.

European youth is still unaware of how bank regulators block so much of their future.

Sir, Gillian Tett in “FISH becomes the European conundrum of US investors” February 15, refers to “a longer term sense of deep unease about the fundamental growth story, not just in the periphery of Europe, but in the core of eurozone too.”

And of course there are reasons to be much concerned. If bank regulators are allowed to stupidly clog the arteries of the financial system, and so that “The Risky”, those actors who operate on the margins of the real economy find it more difficult than usual to access to bank credit, the economy will stall and fall.

Lending to “The Infallible”, fiscal stimulus, quantitative easing or similar, are all great to make the economy grow, but that growth is based on fats and carbs and, in the absence of “The Risky”, those who provide the proteins,it will only lead to a flabbier and ever weaker economy.

Some colleagues of Gillian Tett will surely some decades from now pose the question: How come the western civilization suddenly became so panicky risk adverse so as to accept regulations which though it might give it a couple of more years of marginal growth, definitely doomed it to shrink away? How come this was not even discussed by the media?

I think they will find their answers in the prevailing dominance of a baby boomer generation flying irresponsible après nous le deluge colors.

Sincerely if the millions of unemployed European youth really came to know about the stupidity that is blocking so much of their future, I would not like to be in a bank regulators shoes, or in the shoes of those hushing it all up for that matter.

“L’economia castrata”

Will now tenured university professors retire on senior retirement campuses?

Sir, in 2004 I published in Venezuela an Op-Ed titled “Real or virtual universities” and in which I discussed imaginary ongoing heated budget debates in the universities, between those who wanted better classrooms and those who wanted better servers. 

When now reading Gillian Tett’s “Welcome to the virtual university and budget learning” February 2, I get the feeling that soon many university campuses might retire by being acquired by chains specializing in retirement homes for the baby boomers, and where perhaps many retiring professors can remain feeling at home. 

Really, if the incentives of the physical universities are not better aligned with the future income realities of their student, their current business model is bound to break. Perhaps the professors’ retirement plans should be based on a percentage of the future earnings of the graduates, at least so as to decrease the risk they will be sued by their former students for failing to deliver what was implicitly promised them.

Mario Draghi is functionally incapable of understanding the “best fundamentals” for Europe.

Sir, Michael Steen reports “Draghi claims eurozone has ‘best fundamentals’” December 18.

Forget it! A former president of the Financial Stability Board, not of the Financial Usefulness Board mind you, and who most certainly thinks of discriminating in favor of “The Infallible” and against “The Risky” as a virtue is simply incapable of understanding the real “best fundamentals” of Europe?

With their capital requirements based on perceived risk and that effectively taxes all those without a top credit rating, and subsidizes those who got one, Draghi belongs to a baby-boomer generation of regulators characterized by wanting to keep it safe, in their life time, in the best “Après nous le déluge” style.

If Europe and the eurozone want to recover the possibilities of a bright future, instead of just trying desperately to slow its decay, then it needs bank regulators who can understand why we go to church and pray “God make us daring!”

Yes we need young who understand that “risk” is the Yin of the Yang “safe”.

Sir, Luke Johnson writes “Europe cannot afford to become a theme park for ageing baby boomers obsessed with nostalgia dreaming of glory day… ruled by cadres of old men who cling to power and wealth like grim death” and “We all need an infusion of youthful vigour” December 5. 

Absolutely! And where we should start is by removing those completely senile regulators in the Basel Committee who believe you can make our banks safer by avoiding what is perceived as risky, failing to understand that “risk” is the Yin of the Yang “safe”, and that for banks, what has always been most dangerous, is almost exclusively what is perceived as absolutely safe. If you really wanted to inject some vigour into Europe, think more in terms of capital requirements for banks that are higher for “The Infallible” and lower for “The Risky”. 

On what I totally disagree with Luke Johnson is on wanting “the Rolling Stones… greedy sexagenarians, to leave the stage”. In their case they are not there, except for us wanting them to be there, just like we love our well worn old warm slippers. 

PS. By the way there are some real rusted oldies in FT too, blocking ideas, and it could benefit all of us if they were to sit down and have a chat with Luke Johnson about this topic.

A 62 years old male

Martin Wolf and the rest of us baby-boomers might soon be invited to visit an “ättestupa”

Sir, Martin Wolf looks to explain “Why the world´s youth is in a revolting state of mind” February 19. He fails to sufficiently transmit the seriousness of the issue something that you might understand better when reading reports about the millions after millions of young men in the Middle East who because of a lack of job opportunities will not ever have the means required to start a family.

Wolf would do well placing all the demographic challenges the world faces in the perspective of the fact that the only objective for our banks their regulators have set, is for the banks not to fail. Perhaps the regulators have been appointed by the baby-boomers with the instructions of making sure their assets are safe while they are still around, in the best “après nous le deluge” style.

No! Our youth deserves our banks perform their capital allocation function freely and without regulatory interference. Otherwise we older, Martin Wolf included, might with reason be invited by the youth to take a walk to the nearest “ättestupa”… meaning those cliffs from which according to a Scandinavian myth the elders threw themselves down when they no longer were useful. But perhaps it is that Mr. Wolf is counting on himself being lucky enough to find himself among those with “resource wealth to buy off their young”

It is indeed hard to find the right moment for sacrifices

Sir in “Private behaviour will shape our path to fiscal stability” November 4, Martin Wolf tells us that it “would have been a monstrous blunder” to lower the private sector surplus through an adjustment that destroyed private income, but also, that not to do so, is a case of “adjustment postponed” which leads to a surge in leverage and new bubbles. I guess it is all about balancing the need for finding the right moment to quit smoking with the fact that once in your grave there is no such need... and so the closer to the grave the higher the incentives for a postponement.

Is this not really a case of this generation of baby-boomers against next generation of baby-boomers?

The regulators did indeed cause this crisis, with their faulty regulations

When in 2002 I arrived from Venezuela, where I had never been assaulted, to Washington DC, in less than 48 hours I was thrown to the floor at handgun point and robbed of my wallet. When I asked the police officer who had helped me to my feet “is this not supposed to be a safe area? he answered “yes, you are right, and that is why these bad figures need to come here to steal”.

If the police had told some neighbourhoods in London that just because they were safer they could lower the guard and leave the doors open and some disaster had ensued, it would surely have been blamed. But this is exactly what the bank regulators did when they authorized the banks to a 62.5 to 1 leverage as long as they were lending or investing in AAA safe areas.

So therefore when John Kay in “Too big to fail’ is too dumb to keep” argues that “the claim that regulators caused the crisis is a ludicrous as the crime due to the indolence of the police” he just shows he has no idea of what happened. 99 percent or more of those losses that detonated this crisis can be traced to this regulatory naïveté. Just for a starter the AAAs of AIG would not have the same value.

The problem we have is that so many are trying to use this crisis to push their particular agenda, which often requires a blatant disrespect for what really happened. Mr John Kay, a true baby-boomer, in the “Après mois le deluge” sense, wants us now to have narrow banks which refuse to underwrite risk-taking, as if society can prosper with non-risk taking banks.

And, by the way, since I am one of the very few who has spoken out loud and publicly against the “too big to fail” before the “too big” started to seem as failures, this is by no means a defence of them.

The speed of a deflation does matter

Sir again you hold that deflation is dangerous, August 7, and that doing too little is a greater danger than doing too much. From the perspective of a baby-boomer that certainly seems to be correct... “Après nous le deluge”, but let me also remind you that although a slow deflation is surely hell a fast one might be bliss, since when touching bottom there is only one way to go.

Yes, it has indeed a lot to do with the battle among generations.

Sir, John Authers is correct bringing in the baby boomers in the equation that explains the current crisis “Why baby boomers will put their faith in bonds”. March 7. 

I have in many letters to FT pointed out the problems with the generational transition between the baby boomers and those who will follow them. The latter have no incentives of buying their retirement roofs at the high prices houses have reached, nor to start investing for their retirement at a Dow at the 14.000 level.

Now the battle among the generations has started for real. The baby boomers are opening asking for stimulus spending to bail them out. It is very difficult to see the upcoming generation capitulating early, and pay the taxes that are needed to support that spending from transitioning into inflation.

Do the bells toll and if so for whom?

Sir, Martin Wolf titles “Why fairly valued stock markets are an opportunity”, November 26, and who would argue with that? It gets much thorny though when figuring out what “fairly priced” really means and for whom the opportunities exists.

Wolf has a go at answering whether the bells really do toll by using a fundamental variable like the market value to the net assets value at replacement cost, though analyzing it mostly as a chartist looking for important inflection points. Anyone who believes or wants to believe that the market is now fairly valued will indeed find some comfort.

Now for whom does the bell toll? The young? Should they buy the shares from the baby-boomers at this level in order to build their own nest for the future or should they better wait? Not a clear call but it sure looks like it will be a horrible battle between the generations.

Should the government, given its deep pocket and the time horizon that is needed buy shares? I think better not. A government, especially when its finances are tight and it will anyhow have to bail-out many baby-boomers in the real world, should concentrate on assisting the birth of the new rather than saving the value of the old, and this even when some advisers guarantee it there are great profits to be made… when buying shares from them.

Is this crisis the beginning of a clash between generations?

Just this morning walking around the park on the farm where my mother lives in Sweden I stood on top of a cliff that is rumoured to be an “ättestupa”, one of those places where Swedes of ages ago were rumoured to have thrown themselves out when they felt they had become a burden for their children. I have always doubted this particular cliff as its relative low height has seemed more inclined to cause a broken foot, only aggravating the burden.

George Magnus writes the “Recession will compound looming issue of rapid ageing” November 6, and though he does have many valid points these are all from the perspective of those on the way out. In this respect we also must acknowledge the needs of those on the way in. This crisis might in fact just be the beginning of a clash between generations.

If you are a prosperous baby-boomer with plenty of assets, then you are indeed interested in keeping the prices of shares and housing growing, and, if just a baby-boomer, to keep your job. On the other hand if you are a young with nothing but future ahead of you, you would not mind seeing the lower prices that could allow you to acquire shares or your house at a reasonable price, or to have the elderly move over so as to get a decent job. I mean, who would like to start building a nest egg for the future with the Dow Jones over 14.000?