The selection of independent central bankers should not be politicized, but neither should the criticism of the candidates be

Sir, you argue that Stephen Moore nor Herman Cain seem to be “remotely qualified to sit in the monetary cockpit of the world’s reserve currency”, “Trump must be stopped from packing the US Fed”, April 6.

Sir, you might very well be right, I know very little about those candidates but I do know that those who have been sitting there for the last decades were perhaps not sufficiently qualified either. 

The 2008 crisis was caused by the distortions in credit allocation produced by the risk weighted capital requirements for banks. To then having central bankers to inject huge amounts of stimulus by means of QEs and ultra low interest rates, without removing those distortions, does show they don’t have a sufficient understanding of what they are up to. Sir, what they have achieved is only to kick the crisis can forward and upwards. Let us pray it will not roll back too hard on us, our children or our grandchildren.

Sir, to be sincere, I do believe that FT’ team, with its silence, has lost any right it could have to throw first stones in the matter of who are suited or not to man the Fed, or any other central bank for that matter.

You argue: “The merest hint that Mr Powell is doing Mr Trump’s bidding is enough to corrode the Fed’s independence.” Sir, for the umpteenth time, when the Fed and other central banks, in 1988, Basel I, approved of risk weighted capital requirements for banks that assigned a risk weight of 0% to the sovereign and 100% to the citizens, they went statists and gave up their independence.

In truth they did exactly what a Hugo Chavez or a Nicolas Maduro would want a Venezuelan central banker to do, namely to be act under the presumption that any bank credit to the government is managed better than a credit to the private sector.

Look back three decades; have you seen any president anywhere who objects to such a Sovereign Debt Privilege?

Greece, a Eurozone nation that takes on debt in a currency that is de facto not its domestic printable one, was even more crazily assigned a 0% risk weight, and ECB knew about it, and kept silence on it. I do not remember you thinking ECB’s bankers as inept.

@PerKurowski

The Fed and bank regulators have done many times more harm to the real economy than the political leadership, President Trump included.

Sir, Rana Foroohar writes:“It is clear that the power of monetary policy to support the real economy has diminished. In lieu of better political leadership, the key task for central bankers in the years to come may be to roll up their sleeves and do the gritty work of bolstering not the markets, but Main Street.” “Central bankers refocus on Main Street” December 31.

That’s not likely to happen. The Fed and bank regulators have clearly evidenced they are not up to that task. Without the slightest consideration to how banks are to serve the real economy, and its needs for development, with their risk weighted capital requirements for banks, they blocked “the risky” Main Street’s access to bank credit, in order to favor all that which was perceived (or decreed) as safe… like residential mortgages (and the sovereign) 

Now every one of them will eagerly be trying to escape his or her responsibility, by blaming Donald Trump, who in many ways is acting as a perfect godsend scapegoat.

PS. “We are almost 10 years into a recovery cycle — the time when economic slowdowns typically occur”. That might be so, but it still sounds so expertly besserwisser. 

"Paga-peo" a Venezuelan name for a scapegoat

@PerKurowski

If only inflation had also measured the price of houses and not just rentals, a lot of problems could have been avoided.

Sir, Jamie Smyth reports on “the end of a five-year expansion, which saw house prices in Australia’s biggest city rise 70 per cent and household debt surge above 120 per cent of gross domestic product — one of the highest levels in the developed world.” “End of Australia housing boom sparks fear of disorderly crash” September 7.

In the housing sector inflation is solely measured based on the rentals, which surely lag house prices. In 2006, in a letter that FT published, I asked: “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.”

If inflation had also partly measured house prices, it would not have shown such low figures, and then inflation targeting central banker would have had to tighten monetary conditions, and bank regulators, their credit and capital requirements conditions. 

How central bankers can just turn a blind eye to it could have something to do with that a great majority, or perhaps all of them, are house owners, and therefore only see good in the value of their houses going up. Now when things are getting out of hands, let’s make sure they are not given any preferences, so that they can learn the lesson in ways that helps them to remember it.

The political convenience of helping house buyers with preferential access to credit only results in house prices going up, and thereby having to provide even more preferential credit. Of course Saul Eslake of University of Tasmania is right arguing, “a gradual deflation of property prices, though painful for some, will do more social good than harm.”

Sir, as I have often written to you, much better that helping young buyers with affordable credits to buy houses is helping them to afford houses, c'est pas la même chose.

A house used to be a home; now authorities made these homes and investment assets. The journey back to being solely homes will hurt, many, a lot. The alternative of inflating ourselves out of the mess could be even worse.

PS. And when push comes to shove are not shares just another type of assets to be included in inflation calculations?

@PerKurowski

EU needs to find a president of the European Central Bank quite different from Mario Draghi… whatever it takes

Sir, you opine, “The most worthwhile tribute that European governments can make Mario Draghi, the president of the European Central Bank, is to find a successor who most closely replicates his attributes and has the best chance of continuing his success. There are few harder acts to follow in global policymaking than his. He has helped rewrite the central banking handbook, shepherding the euro through an existential threat from the sovereign debt crisis and the danger of a deflationary recession. “Next ECB chief should be in the Draghi mould” August 30. 

I disagree and believe that FT, at some point down the road, will have to eat up these words of praise for Draghi; who alsopreviously served as the Chairman of the Financial Stability Board from 2009 to 2011 and Governor of the Bank of Italy from 2005 to 2011.

Draghi, as a regulator, with the risk weighted capital requirements for banks was partt of the team that introduced a risk-aversion, which ignored all the valuable services banks provided, when acting as the societies’ designated risk-takers.

Draghi, as a regulator, ignoring conditional probabilities, supported risk weighted capital requirements for banks based on the perceived risk of assets and not based on how banks could manage those assets dependent on their own perceptions of risk. That distorted the allocation of credit, causing among other banks to fall over a precipice when chasing those AAA to AA rated securities they were allowed to leverage a mind-blowing 62.5 times with.

Draghi, as a regulator, was, is, a statist of first degree, for agreeing with risk weights of 0% for the sovereign and 100% for the citizen.

Draghi, as a European central banker, who must have known that the challenges the euro posed had not been taken care of, irresponsibly agreed when Greece was assigned a 0% risk weight, which caused its current tragedy.

What Draghi did in ECB, was just to act as the principal member of that kicking team that kicked the crisis-can down the road, willfully ignoring the fact that European grandchildren will suffer when that can begins to roll back on them.

Sir, in summary, the next ECB chief should know about the importance of risk taking, about conditional probabilities, should not be a statist, and should be able to refuse punishing a EU nation, like Greece, for the mistakes of EU authorities. 

So, whatever it takes, he should be very different from Draghi. I would hold that EU’s own chances of survival depends much on that. 

@PerKurowski

During this year’s central bankers’ Jackson Hole meetings, will there finally be a seminar on conditional probabilities?

Sir, you write “The global economy and financial markets remain relatively benign, but the political environment in which central banks once operated has changed, perhaps for ever” “The tricky politics of being a central banker” August 24.

Indeed, but all is not that tricky for central bankers and their financial sector regulation colleagues. Just think of how they have all been able to progress, for soon thirty years, Basel I 1988, without any knowledge about conditional probabilities. 

Imagine, even after a 2007-08 crisis, caused 100% by assets that had extremely low capital requirements, only because these assets were perceived as extremely safe, and they have not yet been called out on that.

If I were to be invited, I would again ask them: Why do you believe that what’s perceived risky is more dangerous to our bank system than what’s perceived safe, have you never heard of conditional probabilities? But of course I am not invited.

Sir, again I will invest some hope that a “Without fear and without favor” FT journalist dares to asks that question. I must confess though that investment will be quite small, as I want to avoid having to be so disillusioned again.

PS. Conditional probabilities and risks for the bank system

@PerKurowski

Should central bankers answer my questions, or are they better off ignoring these?

Gillian Tett writes: “A century ago…central bankers barely talked to the public. Montagu Norman, the Bank of England governor from 1920 to 1944, is thought to have said: “Never explain. Never excuse.” That was partly because bank chiefs did not expect ordinary mortals to understand finance. But they also believed aloof detachment increased their authority.” “Should central bankers engage with the public?” July 28.

Sir, consider that I have with all means, even begging journalists to ask the questions, not been able to get an answer on something that should be very much within the general area of interest and responsibilities of a central banker, namely bank regulations.

My questions are simple and straightforward.

Why do you think that the regulators think that what is perceived as risky is more dangerous to our bank systems than what is perceived as safe? Could it be because regulators look at the risk of the assets of a bank, like bankers do, and do not look at the risk those assets could pose to the bank system, as regulators should do?

Why do you think that allowing banks to leverage differently their capital (equity) with assets based on different capital requirements, could not very dangerously distort the allocation of bank credit to the economy?

When are those European central bankers/regulators who assigned a 0% risk weight to Greece, going to be named and shamed, for dooming that nation to the so tragic consequences of excessive public debt?

Sir, “If Montagu Norman saw [my questions] what would he make of it all?”

Perhaps: “Never explain. Never excuse”, most especially when you have no explanation and you have no excuse?

@PerKurowski

Is the Eurozone intent on once again give Greece's government a much lower risk weight than that assigned to a Greek entreprenuer?

Sir, Jim Brunsden writes: “Eurozone finance ministers are poised to give Greece debt relief —The plan is to help convince investors that Greece is ready to return to markets when its bailout programme expires in August.” “Creditors set to reach agreement over Athens debt deal” June 21.

That sure does sounds scary if the “convincing of the investors” once again includes giving the Greek government, for the purpose of the capital requirements of banks, a lower risk weight than it merits. That would be sheer cruelty.

Let us never forget (though the statists have classified it as something that should not be named) that it was the insane 0% risk weight assigned to Greece by European central bankers that got that country into its so tragic difficulties.

In my opinion the Greeks (or at least Yanis Varoufakis) should have taken those central bankers to the European Court of Justice long time ago. Imagine what would have happened to a credit-rating agency had it assigned such 0% risk weight to Greece?

https://subprimeregulations.blogspot.com/2011/11/who-did-eurozone-in.html

@PerKurowski

Central bankers have surely favored government borrowings… and the costs will be horrendous.

Sir, Desmond King reviews and discusses Paul Tucker’s “Unelected Power”, which asks:“To whom are central bankers responsible? How is oversight of their discretionary authority monitored in a democracy? Can central banks remain legitimate as they choose financial winners and losers?”

The starting point for Tucker’s questions seems to be when, in September 2008, “Citizens and bankers sat transfixed as Lehman Brothers collapsed, rattling equity and credit markets”.

Wrong! Not that I had any idea of it back then but the genesis of the problems herein referred to seem to me be in 1988 when bank regulators came up with the incredibly hubristic concept of risk weighted capital requirements for banks, as if anyone could measure ex ante the risks that would explode ex post.

From a cv. on the web I see that Paul Tucker worked in 1987 in “the Banking Supervision Division; as part of the 4 person team negotiating the Basle International Capital Convergence Agreement; and assistant to chair of Basle Supervisors Committee”

So when King writes that “Tucker argues that the “most compelling reason” for [central bank independence] is to “enable governments to save paying an inflation risk premium on their debt”, I must ask: “Really Mr. Tucker, does that require risk weighing the sovereigns with 0% while assigning the citizens 100%?” 

That regulatory subsidy causes, sooner or later, governments to take will be getting up too much debt, that which can only be repaid by the printing machine… meaning inflation… meaning tragedies. 

I have not seen anyone holding Sir Paul Tucker accountable.

PS. I dare Paul Tucker, the current chair of the Systemic Risk Council, to give a coherent explanation for why banks should hold more capital against what’s made innocous by being perceived risky, than against what’s perceived safe and therefore carries more dangerous tail risks? The distortion that produces in the allocation of bank credit constitutes, as I see it, a huge systemic risk.

@PerKurowski

We sure have a major problem with central bankers that seemingly haven’t the faintest about what they’re doing.

Sir, Matthew C Klein writes “Rightly or wrongly, most central bankers think their mission is to keep the growth rate of consumer prices slow and stable. Even in places, such as America, that also ask the central bank to promote “maximum employment”, the inflation mandate is paramount.” “Central bankers have one job and they don’t know how to do it”, Alphaville October 18.

And the Klein proceeds to describe the existing confusion with respect to how to measure inflation, how to generate it if it is so good, and how to fight it if it is so bad. 

But equally, when central bankers have anything to do with bank regulations, they think their mission is solely to keep banks from failing, without giving a single thought to the fact that banks are supposed to allocate credit efficiently to the real economy.

And even in this their silly limited objective they fail; that because they have not understood that what is really dangerous to the bank system, is not what is ex ante perceived as risky, but what is ex ante perceived as very safe and which therefore can generate dangerous excessive exposures to what might ex post turn out to be very risky… all this currently aggravated by the fact that regulators allow banks to hold especially very little capital (equity) against what is perceived as safe.

Sir, do we have a problem!

@PerKurowski

How could central bankers, and Martin Wolf, convince us (me) they know what they are doing?

Sir, Martin Wolf asks: “What might central banks do if the next recession hits while interest rates were still far below pre-2008 levels?” And he answers, “the most important part of such preparation is to convince the public that they know what to do.” “Prepare for the next recession”, February 5.

Not an easy task. For example I have always felt more uneasy with what banks might ex ante consider safe, than with what they could perceive as risky. But regulators, with Basel II, introduced risk weighted capital requirements for banks in which they for instance assigned a risk weight of 150 percent to assets rated as ‘highly speculative’ below BB-, while only a meager 20 percent risk weight for ‘prime’ AAA rated assets.

That not only seriously distorted the allocation of bank credit to the real economy but also set up banks for, when any ex post credit risk realities could sink in, that they stand there with little equity to cover themselves up with.

But seemingly there is no way I can convince central bankers, regulators, or Martin Wolf, that is a dangerous nonsense and so, at least in my view, I am convinced they do not know what they are doing.

Wolf also comments on the notion that doing nothing, searching for a “cleansing depression” is “crazy, given the damage it would do to the social fabric”. I am not sure. In August 2006, FT, before I was censored, published a letter I wrote titled “Long term benefits of a hard landing” and nothing about the many efforts to achieve a soft landing I have seen, have really made me change my mind.

@PerKurowski ©