If building houses where they are actually wanted, which we should, what do we do with the unwanted lot?

Sir, Robin Harding holds “What should not be in doubt is that supply limits are the single biggest problem with housing… reform the planning rules, and let people build homes where they are actually wanted.” “Planning rules are driving the housing crisis” August 15.

I agree, of course we should build houses where they are actually wanted, but the challenge of what to then do with the unwanted lot, poses major difficulties. 

It is not solely “the role of falling interest rates in pushing up house prices” that has caused houses to become financial assets. Much other preferential treatment is given to the financing of house purchases. Among other, because the financing of houses is perceived so safe by regulators, banks need to hold much less capital against residential mortgages than, for instance, against loans to entrepreneurs. (Those entrepreneurs who could create the jobs that would allow for mortgages to be duly serviced and utilities to be paid).

All that has helped house prices to shoot up and become the most important financial asset for way too many, whether for the owners, or for the banks or other who have helped many owners to extract whatever equity he had in his house.

As a consequence our society, our economies, have become mindboggling exposed to the need of keeping up house prices, while simultaneously needing house prices to become more affordable. To navigate well those waters will not be an easy task. 

Looking at some demographic realities perhaps what needs to be done is not to build more houses, but to build more senior citizens residences, thereby freeing many upstairs so that children could move up from the basements or other young move in.

@PerKurowski

Bank regulators have clearly violated that holy social intergenerational contract Edmund Burke wrote about.

Sir, Marin Wolf writing that while “UK has messed up policy in five significant respects: growth; ageing; risk-sharing; housing; and redistribution.” argues that the focus on intergenerational equity is not helpful” “The focus on intergenerational inequity is a delusion” May 18.

In that I do not agree.

For the umpteenth time: The risk weighted capital requirements for banks, that which allow banks to leverage more and thereby earn higher expected risk adjusted returns on equity when financing what’s perceives as safe, like the present economy, houses and sovereigns; over what’s perceived as risky, like the riskier future and the entrepreneurs, is a direct violation of that very core of minimum intergenerational equity that should guide our actions.

And not only will our young pay dearly for it. Those young currently living in the basements of their parents' houses will one day shout out: “Now it's our turn to live upstairs, you move down to the basement!” And way too many of those elder who possess assets, like houses and shares will, when they really need, find it very hard to convert these into the main-street purchase capacity they hoped for.

I pray it will not come to that, but it is useful for everyone to look at Venezuela where their young are now all fleeing to find better opportunities abroad, while most of the elder are stuck in a society that is rotting. And from boom to bust can happen so fast.

@PerKurowski

Whether pension plans are based on defined benefits, defined contributions or a mixture thereof, in order to deliver, they all depend on the economy being healthy.

Sir, I refer to Martin Wolf’s “The case for an alternative pensions model” April 6.

For decades I have sustained that the best pension plan that exists, is to have loving children working in a functional and reasonably healthy economy. And that long before Venezuela proved how good pension plans could come rapidly to absolute naught by irresponsible governments.

If the economy is in shambles when pension fund assets have to be converted into purchasing capacity, it does not matter whether these are based on defined benefits, defined contributions or a mixture of these.

With risk weighted capital requirements for banks that favor an over-indebtedness resulting from financing the "safer" present consumption, like houses, over the financing of riskier future production, like entrepreneurs, there will be no economy capable to deliver even a fraction of what is currently expected from pensions.

Wolf refers to the importance to sharing “the risks among a very large group of people…across generations”. Indeed but those now young will tomorrow ask Wolf and his generation… why did you not allow banks to share in the risk taking needed for us to have a future?” and they might with justification give their elders the finger.

Currently, having already to live in the basements of their parents houses because of the lack of jobs, the minimum the young today will hold tomorrow is: “Mom, dad, you move downstairs, its our turn to live upstairs!”

PS. Yes, I am obsessive about the distortions that the risk weighted capital requirements for banks cause in the allocation of bank credit to the real economy, but Martin Wolf, for less worthy reasons, is even more obsessive when ignoring it.

PS. Current “midlife crisis” could be a piece of cake compared to what awaits.

@PerKurowski

When banks can leverage more their equity financing “safe” built houses than financing “risky” job creation, too many young are doomed to live unemployed in our basements

Sir, Bill Mendenhall in a letter of December 18, “Lord Turner got there first on productive credit” mentions a report by Jim Pickard “Labour looks at making mortgage lending harder for banks” December 12. Pickard’s report was not in FT’s US edition.

Pickard wrote: “Shadow chancellor John McDonnell is considering making mortgage lending more onerous for banks in an effort to push them to lend more to smaller companies…The proposals were set out in “Financing Investment”, a report commissioned by the Labour leadership and written by GFC Economics.

According to GFC, British banks are “diverting resources” away from vital industries and instead focusing on unproductive lending, such as consumer credit borrowing.

The paper argues that the Prudential Regulation Authority, the BoE’s City regulator, should use existing powers to make banks hold relatively more capital against their mortgage lending. The report’s authors say this would be an “incentive to boost SME lending growth”.

The GFC report also claims that the BoE’s Financial Policy Committee “makes no distinction between unproductive and productive lending” to companies, arguing that the banking sector “should be geared towards stimulating productive investment”.

The report calls for the FPC to use existing powers to vary the risk weights on banks’ exposures to residential property, commercial property and other segments of the economy.

The report acknowledges that such interventions would be seen by critics as risky measures that could “impede the smooth functioning of markets” and distort the efficient allocation of capital. But it warns that “financial stability risks will emerge if an economy loses its competitiveness”.

Sir, you must be aware that this includes much of what I have written to you in thousands of letters, for more than a decades, and that you have decided to ignore.

But, if that report acknowledges that “to vary the risk weights on banks’ exposures to residential property, commercial property and other segments of the economy… would be seen by critics as risky measures that could ‘impede the smooth functioning of markets’’, why does it not then question the distortion the current existing differences in risk weights cause?

Pickard also mentions that the report warn that “financial stability risks will emerge if an economy loses its competitiveness”. No doubt! Banks cannot be the sole triumphant survivors in an economy that is losing strength.

And when now Mendenhall writes that “Lord Turner got there first on productive credit” because in his 2015 book Between Debt and the Devil he pointed out that “the banking sector’s decades-long switch away from lending to businesses towards mortgage lending only serves to inflate asset prices, which leads to property bubbles”, that does not mean that Lord Turner really understood or understands what has happened.

In June 2010, during a conference at the Brooking Institute in Washington DC, I asked Lord Turner “Do you really think the banks will perform better their societal capital allocation role if regulators allow them to have much lower capital requirements when lending to the consolidated sectors than when lending to the developing?

To that Lord Turner (partially) responded: "we try to develop risk weights which are truly related to the underlying risks. And the fact is that on the whole lending to small and medium enterprises does show up as having both a higher expected loss but also a greater variance of loss. And, of course, capital is there to absorb unexpected loss or either variance of loss rather than the expected loss.”

Pure BS! With that Lord Turner evidences he ignores that banks already clear for the higher risks when lending, so that when also clearing for it in the capital, the whole credit allocation process gets distorted… and banks end up lending more to build “safe” downstairs for our children to live in with their parents, and lending less to “risky” entrepreneurs who could get them the jobs to afford buying their own “upstairs” 

No, Lord Turner is just one of those too many regulators that want banks to hold the most capital against what is perceived as risky, while in fact it is when something perceived as safe turns out to be risky, that we would most like that to be the case.

@PerKurowski

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

The safest route for UK might be to take to the seas in a leaky boat, abandoning a safe haven that is becoming dangerously overpopulated.

Sir, Martin Wolf writes: “A significant generational divide has opened up. Those aged 22-39 experienced a 10 per cent fall in real earnings between 2007 and 2017. They were also particularly hard hit by the jump in average house prices from 3.6 times annual average earnings 20 years ago to 7.6 times today. Not surprisingly, the proportion of 25-34 year olds taking out a mortgage has fallen sharply, from 53 to 35 per cent.” “A bruising Brexit could shipwreck the British economy” November 17.

Sir, I would argue that has a lot to do with the fact that banks are allowed to leverage much more their equity when financing “safe” home purchases than when for instance financing job creation by means of loans to “risky” SMEs and entrepreneurs.

Because that means banks can earn much higher expected risk adjusted returns on their equity when financing home purchases than when instance financing job creation by means of loans to SMEs and entrepreneurs… and so they do finance much more home purchases than risky job creations.

But Martin Wolf does not think so. He thinks bankers should do what is right, no matter the incentives. I think that is a bit naïve of him.

The way I see it, one of these days all the young living in the basements will tell their parents. “We’ve been cheated. You move down and we move upstairs.”

And it will be hard to argue against that. My generation has surely not lived up to its part of that intergenerational holy social contract Edmund Burke wrote about. 

Wolf ends with “The UK has embarked on a risky voyage in a leaky boat. Beware a shipwreck”. No! I would instead hold that its bank regulators made it overstay in a supposedly safe harbor that is therefor rapidly and dangerously becoming overcrowded.

“A ship in harbor is safe, but that is not what ships are for”, John A Shedd.

Sir, I have no idea if Martin Wolf has kids but, if he had, would his kids have grown stronger if he had rewarded them profusely for staying away from what they believe is risky? I don’t think so.

PS. If Brexit goes hand in hand with a Baselexit, Britain will at least to better than now.

@PerKurowski

When a loan to buy a house is worth more to a bank regulator than a loan to a job-creator, things cannot end well.

Sir, Chris Giles writes: “The reason why we have more “boomerang families” and grown-up kids applying to “the bank of Mum and Dad” is because forming a new household is so expensive for young people. Much pricier than it was for those of us who bought houses in the 1990s.” “However you analyse it, housing is in a mess” November 10, 2017

With Basel II of 2004, bank regulators, assigning a 35% risk weighting of the basic 8% capital requirement, allowed banks to leverage their equity 35.7 times to 1 when financing residential mortgages. But if financing an unrated 100% risk weighted entrepreneur, those who could help create the jobs our young needs to be able to buy their own houses, then the banks were only allowed to leverage their equity 12.5 times to 1.

So if entrepreneurs might have had a 25% possibility of having their credit applications approved in the old good days of one capital for all and all for one capital, now that could have been reduced to 5%.

So should we really be surprised if our young ones end up living without jobs in their parents’ basements?

So should it surprise us if those young one day say: “We were cheated. Ma-and-pa, you move down to the basement, now it’s our time to live upstairs”

@PerKurowski

How much will the fewer younger be willing to give up in order to help the larger number of older?

Sir, John Dizard argues that It is hard to have a tax cut-driven jobs boom for the ‘real Americans’ if there are fewer of them around” “Financial world’s promises impossible to meet within an ageing demographic” October 22.

Indeed, demographics will make all so much serious, but let us not assume things are going so as to be a rose garden without that factor.

The kicking the 2007-08 crisis can forward with QEs; the ultra low interest rates that makes it easier to take on debt and in some ways introduces economic laziness; getting equity out of homes like with reverse mortgages in order to spend; risk weight of 35% on financing residential houses and of 100% when lending to the riskier SMEs and entrepreneurs who have the best chances of building future and create jobs; a mindless 0% risk weight for so many sovereigns only based on that these can print money to repay… is driving the world towards a crisis not only because of the lack of young workers, but also because of excessive unpayable debts.

There will come a day when all those young living in the basements of their parents’ houses will say “Hey ma-and-pa, you go downstairs, now it is our turn to live upstairs”… and that is perhaps even the best case scenario. Things can get to be truly ugly (ättestupa)… except perhaps if we are able to put billion of robots to productive uses (like they are trying in Japan) and tax them and share out those revenues with a universal basic income.

I have always argued that the best pension plan that exists is having children and grandchildren that love you, and who are able to work in a workable economy. Thank God I got the first… but I am beginning to seriously doubt achieving the second. 

@PerKurowski

Basel rules favor building “safe” basements for children to live with parents over financing “risky” job creation

Sir, Chris Watling writes “High house prices contribute to one of society’s great divides: that is between the haves and the have nots; between the older property-owning generation and younger renters unable to get on to the property ladder… Banks [when financing houses] now require substantially less capital than would have been required before Basel I and one-eighth of the capital required versus a corporate loan.” “Blame Basel capital rules for the UK’s house price bonanza” June 15.

Absolutely! The Basel Committee’s risk weighted capital requirements helps finance the “safe” basements where kids without jobs can live with their parents, but not the “risky” SMEs or entrepreneurs that could give the kids the jobs that could help them afford to buy a house… and less so at the current high credit inflated prices of houses.

How many letters have I written to you about the distortions in the allocation of bank credit to the real economy these regulations cause? Here are just some quite similar to this one. http://teawithft.blogspot.com/search/label/basements

Sir, you define yourself as “Without fear and without favour”… but the way you have silenced my arguments, only shows you running scared by some of your prima donnas with weak egos.

@PerKurowski

P.S. Washington Post. December 2018: “Affordable homes or houses as investment/retirement assets?”

Patrick Jenkins, in banking, its current regulators lie out of their teeth’s, or are just incredibly dumb and inept.

Sir, Patrick Jenkins writes: “No sector, though, can compete with banking for the scale, depth, longevity or variety of lying that has infected a whole way of doing business.” “Bank bosses have to ensure that honesty is the best policy” March 14.

Perhaps but if so that lying is shared with its regulators.

Not a week goes by without at least one major financial media referring to Basel ratios that indicate banks are well capitalized. A responsible regulator should be out there answering such affirmations by reminding everyone that these ratios are; first not at all comparable with historic capital ratios based on non-weighted assets; and that they mean nothing if the risk weights are wrong. But the regulators don’t! They just play along. 

And to state that those rated AAA, those who regulators assign a risk weight of 20%, are more dangerous to the bank system than those rated below BB-, those who regulators assigns a 150% risk weight to, is a mindboggling blatant lie, or a stupidity out of this world… have a pick!

Jenkins concludes among other with “More important still is that bank bosses themselves prioritise long-termist decency over short-termist profit-chasing”

Few things are more short-termist, or less long termist, than allowing banks to leverage more their equity, which means earning higher risk adjusted returns, with what is “safe”, usually the past and present, than with what is “risky”, usually the future.

Just think of it, a 35% risk weight on residential mortgages, and one of 100% for SMEs. That would seem to doom our young to have to live without jobs, forever in their parents’ basements… or, if there is a reverse mortgage on it, until the house is repossessed by the bank.

And Sir, if not directly lying, is not keeping mum on it at least sort of withholding the truth?

@PerKurowski

Help! Our so serious looking bank regulating technocrats are guided by childish romantic illusions. That’s dangerous.

Sir, Arthur Beesley and Alex Barker quotes Frans Timmermans, vice-president of the European Commission with: “Politics is always a balance between the head and the heart. In European politics we’ve sort of forgotten about the heart for too long, just thinking with the head. Then you end up in the underbelly, apparently, in some of our member states.” “Timmermans urges EU ‘not to punish Brits’”, February 3.

For EU politics that could be correct, though I really don’t know, and besides there are always more or less intelligent heads. But, in the case of regulations where only heads should be at work, there I am 100% sure, at least in the case of bank regulators, that only hearts reign.

That is because anyone who thinks that what is ex-ante perceived as risky, is ex post more dangerous than what is perceived as safe, is a naïve romantic full of illusions. The smart heads, like Voltaire did, would say “May God defend me from my friends, I can defend myself from my enemies”

Now for those who like EU have embraced the Basel Committee’s principles, this means for instance that a bank is allowed to hold less capital (equity) when financing the purchase of a house, than when lending to a SME or an entrepreneur.

That means a bank can leverage its equity more when financing the purchase of a house than when lending to a SME or an entrepreneur.

That de facto means a bank can earn a higher expected risk-adjusted return on equity when financing the purchase of a house, than when lending to a SME or an entrepreneur.

Consequentially that means banks will much prefer financing the “safe” basements in which kids without jobs can live with their parents, than the “risky” SMEs or entrepreneurs that could help the kids get the jobs they need to be able to afford buying a house and become parents too.

If that is not extraordinarily dangerous for the future of EU, what is? Sir why don’t you suggest Timmermans that if he has some 100% head-applying technocrats available, then he should urgently have them to take over current bank regulations. 

@PerKurowski

Our younger generations have much more valid reasons than savers and bankers to profoundly resent bank regulators

Sir, Patrick Jenkins reports that the world’s savers and bankers have every reason to resent the posse of policymakers, one of the most powerful quangos in the world, the Group of Central Bank Governors and Heads of Supervision — GHOS for short, and that will meet on January 8”, “Time for GHOS train to leave the shadows and reconnect” January 3.

At the meeting the group will discuss “the future direction of global financial regulation” the “system of risk-weighting the assets on banks’ books” and “the riskiness of banks’ mortgages and SME lending”

Well no. Those who most should resent GHOS (and the Basel Committee for Banking Supervision) are the young.

These irresponsible bank experts, without considering the purpose of banks, and without any empirical studies on what causes bank crises, decided that it was much better and safer for banks to finance “safe” houses than to finance “riskier” SMEs.

That translated into bank financing more the basements where unemployed young can live with their parents, than financing the job creation that can allow the young to be able to afford becoming parents too.

To top it up, they also decided that it was much safer to lend to the governments than to the private sector.

I have for more than a decade and in more than 2.500 letters tried to convince FT to help me to ask these “bizarrely secretive” regulators some very basic questions. Unfortunately until now I have had no such luck.

@PerKurowski

That banks have strengthened is pure wishful thinking, as most of it is the result of weakening the real economy.

Sir, Brooke Masters’ writes: “Eight years after the financial crisis, we were all getting bored with bank stress tests. Most of the institutions are so much stronger and better capitalised than they were” “UK’s tough stance on banks contrasts with global mood” December 3

That’s not really so. Most of the strengthening is the result of banks shedding “risky” assets in favor of safe, so the other side to that coins is having in the medium and long term run made the real economy weaker.

As I have complained about for years, current stress tests only look at what is on the balance sheets of banks, ignoring completely the aspect of what should have been there.

With respect to “imposing “output floors” on the models. These would effectively raise capital requirements for some banks by pushing up the value of their risk-weighted assets”, the real question is, how could regulators be so naïve so as to think those risk models were not going to be tweaked? Lower risk determination, means lower capital requirements, means higher leverages, means higher expected risk adjusted returns on equity.

With respect to “floors unfairly penalise banks with unusually safe assets, such as those who keep a lot of low-risk mortgages on their books”, the question is when will banks keep on favoring the “safer” construction of basements were the jobless young can live with their parents over the “riskier” lending that could allow the young to find the jobs they need in order to become responsible parents too?

Sir, you want strong banks? Keep them on a tight capital leash without distorting what they do? You want weak banks? Make them operate only in what is safe and help them with their returns on equity by being very accommodative allowing high leverages.

@PerKurowski

Over time simplewissers will always trump condescending besserwissers

Sir, Joan Williams writes: “working-class whites who feel abandoned by professional and business elites. A few…have noticed their pain, but for the most part elites’ social consciences have been aimed elsewhere, at ending racism or sexism, at environmentalism or eating food that is sustainably farmed.” “Cluelessness about class means we miss Brexit lessons” November 24

Unfortunately the working-class whites are just the tip of the iceberg. The day our young will realize that we their elders have gladly allowed banks to finance the construction of the basements where they can stay with us, but not the SMEs that could give them the jobs they need in order to also afford becoming parents, something really bad could happen.

Over the years I have had way too many opportunities for my liking to remember that not fully confirmed Viking tradition of the ättestupa, that cliff from which the elderly voluntarily jumped from when not being any longer useful to society.

@PerKurowski

And there are similar ones at Grand Canyon

How can economies gain vitality when banks finance more basements for jobless kids to stay with parents, than SMEs?

The Basel Committee’s risk weighted capital requirements for banks set the risk weight for financing residential houses is 35%, while the risk weight for loan to unrated SMEs is 100%.

That clearly means regulators feel it is better for banks to finance the “safer” basements where jobless kids can live with their parents, than to finance the “risky” SMEs that could create jobs for the kids, so they too could afford to become parents.

And to top it up, since they assign a risk weight of 0% to the sovereigns, these statist regulators also believe that bureaucrats know better what to do with bank credit credits than the private sector. 

So Sir, I am truly aghast that with such regulatory lunacy well alive and kicking, you can still believe in what you opine in “The eurozone economy regains some vitality” October 25.

@PerKurowski ©

Europe beware, Mario Draghi and his buddies are playing “she loves me - she loves me not” with your future

Sir, I refer to Claire Jones reporting on Mario Draghi’s difficulties on deciding what to do “to come up with a stimulus package that convinces markets the ECB is doing enough both to keep the fragile recovery on track and to keep hawks on his governing council onside”, “ECB has six weeks to update QE, says Draghi” October 21.

Mario Draghi was the former chair of the Financial Stability Board, and is the currently the President of the European Central Bank and chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision. No doubt that in the area of high-finance, Draghi is about as important as one can be… perhaps more important than one should be allowed to be.

Because Mario Draghi, though he might be a very knowledgeable technocrat, in the sense that he knows for instance that it can be quite risky for a bank to lend to an unrated SME, something with which all bankers would agree, is unfortunately not sufficiently wise to understand that what is for instance rated as super-duper safe AAA, is what can be truly dangerous for banks, precisely because bankers do also not think that to be dangerous.

And unfortunately Mario Draghi, like his regulatory technocrat buddies, seems also to have missed out on a Finance 101 course. That because seemingly he does not understand that when you allow banks to leverage more their equity, and the support these receive from society, with assets that are perceived safe than with assets perceived risky, banks will invest more than usual in what’s safe, because there is where it will obtain higher expected risk adjusted returns on equity. And the consequences of that are twofold, and both negative. First it leads to dangerously overpopulating the safe havens, and second, equally dangerous, especially for the real economy, to underexploring those risky bays where SMEs and entrepreneurs reside. 

As an example, the risk weight the Basel Committee has assigned to the financing of residential housing is 35%, while that for unrated SMEs is 100%. This causes banks to finance the basements where the kids can live with their parents, but not the necessary job creation required for the kids to be able to become themselves parents in the future.

It is truly shameful! Europe (and world) wake up!

@PerKurowski ©

Mark Carney: Who should offset the credit distributional consequences of the risk/future adverse bank regulations?

Sir, Martin Wolf mentions that BoE’s Mark Carney, noted monetary policy has distributional consequences but “it is for broader government to offset them if they so choose”. “The unwise war against low interest rates” October 19.

The risk weighted capital requirements for banks has distributional consequences too, in this case with respect of bank credit.

For instance, a risk weight of 35% when financing residential housing, and a risk weight of 100% for loans to SMEs, helps the young to have more availability of basements in which to live with their parents, than perspectives of a new generation of jobs.

And the blatantly statist 0% risk weighting of the sovereign, skews the distribution of credit away from the private sector and towards government bureaucrats.

So the question is: Should we now try to add a new layer of non-transparent complications so as to try to offset those credit distributional consequences, or should we simply get rid of risk-weighted capital requirements altogether?

I clearly favor the latter option but, doing so, I have to continuously confront those who like Martin Wolf know, quite correctly, that a below BB- borrower is risky (150% risk weight) but, unfortunately, do not have the necessary wisdom to fathom that what’s AAA rated, and therefore only 20% risk weighted, is, or will be made by this, much more dangerous to bank systems.

Wolf also states: “Lower interest rates need not worsen pension deficits; that depends on what happens to the value of assets held by pension funds. Normally, lower interest rates should raise the latter. What would lower both real interest rates and asset prices is greater pessimism about economic prospects. Central banks do not cause such pessimism but try to offset it.”

That is so very wrong! The only moment when the value of assets held by pension funds is really important, is when these have to be sold in the market in order to access purchasing power for the pensioners. And with these risk weighted bank regulations that impede banks from financing the risky future, and have these only refinancing the safer past and present, you can bet that the future economy will not be strong enough to pay well for those assets.

Of course Wolf might think it is the bankers’ duty to overcome such regulations, but that would be to ignore completely the overriding objective of bankers which is to maximize the risk adjusted returns on equity (and their bonuses).

PS. On the issue of low interest rates, let me as a financial consultant with extensive main-street experience, remind you that few things stimulate projects to advance faster from plans into income generating realities, than high interest rates. Low interest rates feed a lot of project execution laziness into the active real economy.

@PerKurowski ©