For capitalism to refunction, first get rid of the risk weighted bank capital requirements.

Sir, Martin Wolf quotes HL Mencken with “For every complex problem, there is an answer that is clear, simple and wrong.” “Saving capitalism from the rentiers” September 18.

Indeed, and the most populist, simplistic and wrong answer to how our banks should function, are the risk weighted bank capital requirements. These are naively based on that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe; and, with risk weights of 0% the sovereign and 100% the citizens, de facto also based on that bureaucrats know better what to do with credit they are not personally responsible for, than for instance entrepreneurs.

And so when that what’s “super-safe”, like AAA rated securities backed with mortgages to the subprime U.S. sector exploded in 2008, this distorted bank credit mechanism, wasted away the immense amount of liquidity that were injected, creating asset bubbles, morphing houses from being homes into being investments assets, paying dividends and buying back shares.

“Tall trees deprive saplings of the light they need to grow. So, too, may giant companies”? Yes Mr Wolf, but so too does these stupid bank regulations.

“A capitalism rigged to favour a small elite” Yes Mr Wolf, but that small elite is not all private sector. The difference between the free market interest rates on sovereign debt that would exist absent regulatory subsidies and central bank purchases, and current ultra low or even negative rates, is just a non-transparent statist tax, paid by those who invest in such debt.

“We need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits.” Yes Mr Wolf, but that should start by getting rid of the risk weighted bank capital requirements, so that banks ask savvy loan officers to return, in order to substitute for the current equity minimizing financial engineers.

“Corporate lobbying overwhelms the interests of ordinary citizens” Yes Mr Wolf, but silencing the criticism of current bank regulations could also be the result of some journalists having been effectively lobbied. Or not?

"Capitalism"? No Mr. Wolf, what we really have is Crony Statism

My 2019 letter to the Financial Stability Board
My 2019 letter to the IMF

@PerKurowski

Ms. Gillian Tett, what is that we really have, capitalism or statism?

Sir, Gillian Tett lectures us interestingly with “If you want to understand what is at stake in this debate, it pays to consider the original meaning of the word ‘company’”... “a society, friendship, intimacy; body of soldiers”, “one who eats bread with you” “in other words initially synonymous with social ties”. “Capitalism — a new dawn?” September 7.

Yet, over the years I cannot rememer Ms. Tett saying a word about that our banks are regulated exclusively so as to be safe mattresses in which to put away our savings, without one single consideration given to their vital social purpose of allocating bank credit efficiently to the real economy. “A ship in harbor is safe, but that is not what ships are for”, John A Shedd.

And Ms. Tett also writes “the 2008 financial crisis had undermined faith in unfettered free markets.” What? Like those “unfettered free markets” with Basel II regulations that when in order to borrow from banks, borrowers would have to remunerate an amount of bank capital of 0% if sovereigns, 1.6% if AAA rated, 2.8% if residential mortgages and 8% if unrated entrepreneurs?

http://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

@PerKurowski

Risk weighted capital requirements for banks expresses a venomous lack of confidence in the future

Sir, Martin Wolf writes “the financial crises that destroyed globalisation in the 1930s and damaged it after 2008 led to poverty, insecurity and anger. Such feelings are not conducive to the trust necessary for a healthy democracy. At the very least, democracy requires confidence that winners will not use their temporary power to destroy the losers. If trust disappears, politics becomes poisonous” “Capitalism and democracy are the odd couple” September 20.

No! Free flowing not encumbered by crony statism capitalism is about as democratic it can be.

But one of the pillars of current bank regulations is that when banks lend to or invest in something perceived as safe they are allowed to leverage more their equity than if that is done with something perceived as more risky. That means banks can obtain much higher risk adjusted returns on equity financing the safer present than financing the riskier future.

The 2008 crisis resulted from too much exposure against too little capital to “safe” AAA rated securities, or to sovereigns decreed safe, like Greece.

The minimal response of the real economy to all stimuli, like QEs, is in much the result of “risky” SMEs and entrepreneurs not having a competitive access to bank credit.

To top it up a zero risk-weight of governments with one of 100% of citizens has nothing to do with democracy and all to do with statism brought in through backdoors.

“Democracy says all citizens have a voice; capitalism gives the rich by far the loudest.” Indeed but self appointed besserwisser regulators gave “the safe” more voice than “the risky.”

Wolf’s article ends with “After the crisis, hostility to free-flowing global finance is strong on both right and left”.

Mr. Wolf, that hostility was preceded, and caused, by that insane regulatory hostility against free-flowing bank credit, about which you have decided to keep mum on.

@PerKurowski

The crisis can of ten years ago was kicked down some roads leading to nowhere

Sir, in your “Ten years on, the crisis leaves a dark legacy” of August 12 you rightly write, “A newly minted mortgage-asset securitisation industry had turned the borrowed capital into very liquid but little-understood securities”; but you so wrongly silence the fact that if these securities were just rated AAA to AA, regulators, with their Basel II of 2004, had allowed banks to leverage their capital (equity) an amazing 62.5 times to 1. If banks only obtained a 0.5% percent margin on these, they would earn a 50% return on equity.

And you recount: “The freeze in money markets hit global banks that had [authorized by regulators] leveraged their balance sheets to astonishing levels. They could not bear the strain… The rest — bank bailouts, recession, central bank intervention — is history. The history is unspooling still”

That’s true, but why is that so? The answer, because our baby-boomer leaders, egged on by failed regulators not wanting to understand or confess their mistakes, were to coward to bite the bullet, and so just kicked the can down some roads. Those roads, because of the distortion produced by the risk weighted capital requirements for banks in the allocation of credit to the real economy, lead to nowhere. If we do not completely eliminate this source of distortion, our capitalism, that which has served the Western world so well, will never regain legitimacy again.

You argue, erroneously I believe: “Financial crises end because market prices for tainted assets are established and credit flows again. In this case, only dramatic action by government made that possible.” On the contrary, had the markets been allowed to act, like what I suggested in 2006 with my letter “Long-term benefits of a hard landing”, we would probably already be clearly out of the woods, and the too big to fall banks would not have just grown bigger still.

Besides Sir, what capitalism do you refer to, that in which bank regulators assigned a risk-weight of 0% to the sovereign, and one of 100% to the citizens? To me that sounds pure and unabridged statism. Could it be you all in FT are devout statists, and that is why you have so insistently silenced my arguments?

@PerKurowski

The political establishment fell prey to an idiotic regulatory technocracy they did not dare to question

Sir, Philip Stephens writes: “Rising populism has been fed by a political establishment in thrall to unfettered capitalism”, “Why the liberal order is worth saving” February 10.

Nonsense! The political establishment fell prey to an idiotic regulatory technocracy they did not dare to question.

Some of the Basel Committee for Banking Supervision’s risk weights used to determine the capital requirements for banks are: The Sovereign 0%; We the People 100%; AAA to AA rated 20%, below BB- 150%.

That has absolutely nothing to do with unfettered capitalism all to do with unchecked and dumb statist intervention.

The liberal order went out the kitchen door of the Basel Accord, in 1988, before in 1989 the Berlin wall felt and the “Washington Consensus” saw light.

Here are some questions that have yet to be posed by someone able to force bank regulators to answer:

@PerKurowski

Martin Wolf seems slightly lost in the oceans of global bank regulations

“A natural connection exists between liberal democracy.. and capitalism... They share the belief that people should make their own choices as individuals and as citizens.” “Democratic capitalism is in peril” August 31.

Absolutely! But Martin Wolf seems not to agree with the right of accessing bank credit freely, and gladly accepts regulators distort with risk weighted capital requirements for banks.

Wolf opines: “Capitalism is inegalitarian, at least in terms of outcomes”

Absolutely not! Capitalism both takes away from the lazy and by offering opportunities, gives to those with initiatives and is therefore extremely egalitarian! It is when besserwissers, like those in the Basel Committee intervene, that capitalism stands no chance to deliver opportunities for all.

Wolf writes: “Today, however, capitalism is finding it far more difficult to generate such improvements in prosperity.”

Yes, how could it not, when regulators allow banks to earn higher risk adjusted returns on equity when lending to the safe than when lending to the risky.

Wolf writes: “Controlled national capitalism would then replace global capitalism”

Frankly, has that not already happened with the risk weights of the sovereigns set at 0% and that of We the People at 100%?

Wolf writes “My view increasingly echoes that of Prof Lawrence Summers of Harvard, who has argued that “international agreements [should] be judged not by how much is harmonised or by how many barriers are torn down but whether citizens are empowered… if the legitimacy of our democratic political systems is to be maintained, economic policy must be orientated towards promoting the interests of …the citizenry”

Sir, frankly, how can citizens be empowered when bank regulators decide that the risk weight of the sovereign is 0%, that of the AAArisktocracy 20%, and that of We the People 100%?

Democratic capitalism is in peril? No it has already been defeated. To recover it let’s get rid of current bank regulators and their dumb regulations.

PS. Here is one new attempt to get people like Martin Wolf to understand what has happened. 

@PerKurowski ©

Was Alan Greenspan just a mole planted in the capitalistic system by statist ideologists?

Sir, I refer to Daniel Ben-Ami’s review of David M. Kotz’ “The rise and fall of neoliberalism capitalism” FT-Wealth, Spring 2015.

It states: “It is richly ironic that the Fed chairman from 1987 to 2006 was Alan Greenspan, an ardent devotee of Ayn Rand, an arch free marketer”.

Hold it there!

Put that in the perspective of the Basel Accord having approved, in 1988, that the risk-weights for determining the equity banks needed to hold when lending to central governments was to be zero percent, while the risk-weight when lending to an SME, or to an entrepreneur, or to an ordinary citizen were set to be 100 percent.

Put that in the perspective of that with Basel II, in 2004, the regulators determined that the same risk weight for a member of the private AAArisktocracy was to be only 20 percent, while the risk-weight applicable to an SME, or to an entrepreneur, meaning to an ordinary citizen was to remain 100 percent.

If anything distorted free markets, that was it!

And in 2007-08 the AAA-bomb detonated and short after "infallible sovereigns" like Greece ran into big troubles

And so what conclusions can we have to reach? Could it perhaps be that Alan Greenspan was just one of many moles, planted by statist or anti-capitalist ideologists, in the heart of the capitalistic system, meaning its banks?