To be able to make our banks safe, at no cost, is a dream that passionately blinds way too many, like the Financial Times.

Sir, with respect to Bank of England’s interest rate increase you explain it with “The decision had all the hallmarks of a committee that has decided that it will only be comfortable when rates are at a higher level that feels more natural”, and so sees what it wants to see, and so you argue “It is far better for central banks to be more clearly and dispassionately guided by the data” “A rate rise and a Bank of England false step” August 3.

Of course, except those for some special reasons need blissful blindness, it is better for most “to be more clearly and dispassionately guided by data”. 

But let me ask you Sir: What data, during the last decades have you seen that in any way shape or form could support the current pillar of bank regulations, namely that what is ex ante perceived as risky is more dangerous to our bank systems ex post, than what is perceived as safe? 

None? Might it then not be that you are also too passionate about hoping to make our banks safe at no cost, so as to understand the data, or the lack of it? Or are you perhaps so passionate you do not even want to see any data that contradicts it.

Yes, I am obsessive about the distortions in credit allocation that the risk weighted capital requirements for banks cause, but Sir, you are just equally, or even more, obsessive with ignoring it.

@PerKurowski

Day by day, the world is losing more and more, of that incredible valuable resource known as blissful ignorance.

Sir, Mohamed El-Erian writes: “These days, even small changes to market paradigms cause outsized price moves, contagion, and unsettling correlations among asset classes.” “Relying on central bank policy manoeuvres risks more volatility” March 8.

Indeed but that is not solely the result from what central banks do.

In 2001 in an Op-Ed I wrote: “The development of decision-making processes has benefits but also risks. Thus we see that the speed of information itself, which promotes quick and immediate response, can exacerbate problems. Before, those who took the problem home to study it, and those who simply found out late, provided the market a damper, which often might have saved it from hurried and ill-conceived reactions.”

When I was young and off to a boarding school in Sweden, with my parents living in Venezuela, I might have sent them one letter per year. They opened it and gladly determined that I was doing ok. Nowadays, if any of my daughters do not report to their mother sort of every six hours, all sort of possible volatility breaks lose.

@PerKurowski ©

Timely accurate information is good, but you’ve got to keep markets guessing too.

Sir, I refer to Philip Augar’s “For markets there is such a thing as too much information” February 2.

Indeed it is a very difficult topic. Even if you want markets to have information, you also need for markets to be guessing in order the keep them on their toes and in form. A market with perfect and timely information could soon lose some of its strength. Its analytical capacity would be much less appreciated and everything would tend to be boringly perfectly priced.

Closely related to this in 2007 I wrote “The dark side of knowledge”. In it I held that too much timely information could chip away at what good is often derived from blissful ignorance.

Also if you report on problems too soon, there will be less time available to correct these, and the curtain might be brought down much too early.

If knowledge suffices then wisdom is worthless

Beware of excessive information. (Blissful) ignorance is a potent driver of financial markets and of human activities.

Sir, Tracy Alloway describes the possibility of adding on, as you go along, new pieces of information that will enhance the knowledge of the risks, for instance in securities backed with residential mortgages, “New mutations beckon for system that shares DNA of each loan’s risk” January 3.

And Alloway quotes David Walker of Marketcore saying “This could be very disruptive, because not everybody is for transparency and accountability. Even if they say they are publicly, they may not be privately.”

It is worse than that! If risks were perfectly known, the price of the securities would reflect this and so there would be little profits to be made trading these, and so perhaps there would be no Wall Street. It is imperfect information that has prices zigzagging, which induces market participant to get out of bed in order to sell the not-too-well-perceived risks and buy the not-so-real-safeties.

In other words, ignorance is one of the most potent drivers of financial markets and human activities; and is therefore quite often characterized as quite blissful… at least by the winners.

But the worst that can happen with excessive information, that is when we, because of it, become convinced that we know it all. Like when bank regulators caused our banks to follow excessively the credit risk perceptions issued by some few human fallible credit rating agencies. Clearly some more information (and humility) about our ignorance would have come in handy.

FT, look at the fine print of the stress tests of European banks before drawing optimistic conclusions

Sir, you write: “In 2012 the Eurozone through a near death experience… Banks were heavily invested in the debt to governments, which in turn were meant to guarantee to solvency of the same banks”… and now you hold that “this week, [because of the stress tests] has finally provided an example of some encouraging progress”, “Better way to check the health of Europe’s banks” October 28.

What if banks came out better in these stress tests, only because they were invested even more heavily into those government debts against which they are not required to hold any capital/equity? Would that change your perception on “encouraging progress”?

PS. You now want the Asset Quality Review to be repeated annually. If you were one of the consultants making a great living on that I could understand it...  but let me ask you... have you ever thought about how much of our economies and of our well being is driven by sheer blissful ignorance?

 

Europe is about to throw away €489m to obtain fairly insignificant new information about its banks.

Sir, Claire Jones, Sam Fleming and Alice Ross report “Consultants to reap €490m from Europe’s banking audit” August 21.

First, we should not ignore that money, if bank capital, and if leveraged at the 3% leverage ratio allowed for banks in Europe, would permit bank credits to the tune of €16.3bn.

But we should also think about what that money can buy, and in that respect I believe it will buy regulators preciously little.

And I say that because we should not have to take a too close look at the balance sheets of banks to know that, because of the risk-weighted capital requirements they have:

Too little equity as a result of being allowed to have too little equity for much of those exposures that gort into real problems, like AAA-rated securities, sovereign like Greece, and real estate in general; and

Too much dangerously large exposures to what is perceived as absolutely safe, like the “infallible sovereigns, because those are the exposures that require the banks to have the least capital of that scarce capital; and

Perhaps even more dangerous because its implications too little exposures to what being perceived as risky requires banks to hold more capital, like loans to medium and small businesses, entrepreneurs and start ups.

What could the fees for that type of consultancy analysis be? Tops €1m? If so Europe will really be throwing away €489m in order to obtain information that on the margin seems to be quite insignificant.

And that does not even consider the fact that quite often, especially in the case of banks, the bliss of ignorance, is a quite valuable commodity.

And now, in the age of transparency, the European Commission is promoting blissful ignorance. Holy mo! Back to the Dark Ages!

Sir, I refer to Steve Johnson’s “Money market ratings ‘outlawed’” of September 9 in your FTfm.

There Johnson writes of a proposal by the European Commission to ban money market funds from soliciting or financing a rating from a credit rating agency” so as “to end the risk of sudden massive redemptions” from a fund in the wake of a rating downgrade, [thereby[] strengthening the financial stability”.

What can we say? Now the European Commission is promoting blissful ignorance. Holy mo! Back to the Dark Ages!

Why do they not just impose a little note after each credit rating stating who paid for it? And let the market take it from there?

Goodbye blissful ignorance!

Sir you insist calling it a “bail-out” plan, when it could just as well turn out to be a take-down plan. The whole world will be watching how the 700 billions are spent putting pressure on buying as cheap as possible and…who is going to be able not to market their investments to the results of this “bail-out”. Goodbye blissful ignorance!

But a share is still (mostly) a share… it’s attractive

Sir, John Plender in “There can be no return to ´normality´ of a freakish bubble” August 30, mentions that “in the midst of all this, many investors are baffled that equity markets have not been seriously damaged”. The explanation for this should be quite clear though, in this freakish market, at least for the time being, a share is still mostly a share, and you can see its value quoted daily, so when you compare it to all those fancy investments where your advisors is currently asking for more time to figure out what it could be worth, give and take 20%, no wonder a share looks attractive.

Are the Scots entrepreneurial or gullible?

Sir Stefan Stern’s “Billions made so far from home” July 7, where he comments on so many “of the UK’s richest . . . are Scottish born – though most have found it necessary to leave the land of their birth to make their fortunes”, led me to think about Richard Llewellyn's “How green was my valley” and John Ford’s Oscar winning movie adaptation of it, even though that particular green valley was welsh.

I once used the “green valley” allegory in a speech to extol the development virtues of blissful ignorance, which allowed Venezuelans go to the USA, Americans to Europe and Italians to Venezuela; and everyone daring to do business just because they lacked information about how difficult the local circumstances were; and since nationals knowing about the hardships too well would never dream of doing anything.

And so the question that now goes around in my head after reading Stern is whether the Scottish born have an especial entrepreneurial sense… or are just an especially gullible lot.

No, it is the courtesy of the regulatory agencies

Sir, John Plender in “A stretched credit cycle, a more savage downturn” May 22, gives a very clear explanation of the blissful-ignorance-bubble when he mentions the fact that many of the positions “are not marked to market” but instead “marked to model”. Where he is wrong though is when he says that “Credit is being mispriced courtesy of credit rating agencies that are insensitive to market risk.” For that we should thank our financial regulators who by ordering the market to listen to the credit rating agencies created a totally new form of non-market market risk.

And please, why does Plender have to say that “high finance has never been more sophisticated”? when in fact many of us suspect we might be living the period where never have high finance people understood so little of what they really were up to.

Please assure Mr. Merton that no one is holding him personally responsible

Gillian Tett does a splendid work interviewing Mr Robert Merton “The appliance of financial science” May 21 and let us hope that on the behalf of all of us she has really been able to convey that we really will not hold him personally responsible for whatever could happen with all of his and his friend’s inventions and creations such as derivatives, option pricings and what have you, just as no one does holds Einstein and his friends responsible for what more bad the nuclear bomb might bring. Of course it will all come down to how these great and useful inventions are used.

Having said that I would like to comment on that when Merton says “Just think of all the crises that haven’t happened, say with the downgrade of General Motors and Ford” it really does not mean the negative effects have disappeared, just that they have been so diluted that we do not notice it. Spreading ink in a lake instead of a bathtub will get less noticed but keep on doing it and then suddenly you will have a whole lake go ink-blue and that could suddenly turn to be even catastrophic.

Question. Are derivatives a way of pushing things forward to future generations so as to better being able to enjoy the blissful ignorance bubble?

How much does blissful ignorance has to do with our current financial bliss?

Sir in your editorial comment “Securitised stability”, April 27 you mention that “there are benefits from dispersing credit risks across the economy: it makes banks less vulnerable for a start, and makes borrowing cheaper for millions of companies and households.” You are in general terms right but let us not forget that, on a world aggregate, diluting the risks does not really mean eliminating them and perhaps even the contrary if the dilution allows for the acceptance of more risks, as seems to have happened with the subprime mortgages in the US… and soon with the highly leveraged buyouts.

Let me advance the idea that what we have lately perceived as benefits from the shifting of credit risks could in fact also have much to do with the creation of a larger world reserve of “blissful ignorance” resulting from having designed so much sophisticated risk camouflage. A millionaire is a millionaire not only as long as he factually is one but also as long as he believes himself to be one, and it is only when the final cash-flow realities hits him that he might wake up to the fact that his portfolio has harboured some very new and peculiar risks.