Mr. Martin Wolf, what do you mean, is liberalism not broken?

Sir, I refer to “Liberalism is battered but not yet broken” Martin Wolf, FT January 10, 2024.

Since 1988, with Basel I, non-elected by the citizens bank regulators, with risk weighted bank capital requirements, in the name of making our banks safe, have allowed themselves to distort the allocation of bank credit to the economy. 

Wolf opines: “What liberals share is trust in human beings to decide things for themselves.” So, Mr. Wolf, why have you been silent on this clear breach of free market liberalism?

These days, in reference to the farmer’s protests in Berlin I have tweeted/Xd: “Would now John F. Kennedy have wanted to deliver his 1963 ‘Ich bin ein Berliner’ speech? - If the Berlin Wall was still up, would Ronald Reagan now have needed to tell Putin, ‘Tear down this wall’?”

My answer in both cases is NO! US and Russia – West and East Berlin, have been too long exposed to communistic weakening. But it’s coming to an end. More and more nations now need more public debt in order to service their current public debts, and are thereby, de facto, becoming zombie nations.

I pray someone with real political standing would dare to stand up and order: “Basel Committee, tear down your regulations.” I fear that might not happen until this “wall” has crumbled on its own. Those regulations have empowered bureaucracy autocracies, and way too many want to be members or beneficiaries of it. And by the way, if they speak up, they risk not being invited to the World Economic Forums in Davos; and we would not want to risk that, would we?

Sir, how can we make sure to capitalize on the opportunity of artificial intelligence helping to empower a citizens’ democracy? I mean before AI regulators decide to send it to Gulag too.

PS. I tweeted - Xd: "If there’s anything that could help focus on what has happened in the world, and on what’s going on, that is to have a record of all those who, since 1971, have assisted World Economic Forum #WEF meetings in #Davos."

FT, on banking and finance who are you to believe, Francis Fukuyama or Paul Volcker?

Sir, Francis Fukuyama in “The war on liberalism” FT March 5, writes:

“Liberals understand the importance of free markets — but under the influence of economists such as Milton Friedman and the “Chicago School”, the market was worshipped and the state increasingly demonised as the enemy of economic growth and individual freedom. Advanced democracies under the spell of neoliberal ideas trimmed back welfare states and regulation, and advised developing countries to do the same under the “Washington Consensus”. Cuts to social spending and state sectors removed the buffers that protected individuals from market vagaries, leading to big increases in inequality over the past two generations.

While some of this retrenchment was justified, it was carried to extremes and led, for example, to deregulation of US financial markets in the 1980s and 1990s that destabilised them and brought on financial crises such as the subprime meltdown in 2008.”

Paul A. Volcker in his autobiography “Keeping at it” of 2018, penned together with Christine Harper, with respect to the risk weighted bank capital requirements he helped to promote and which were approved in 1988 under the name of Basel I wrote:

“The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages. Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011. The American “overall leverage” approach had a disadvantage as well in the eyes of shareholders and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities."

Sir, in reference to advising developing countries with the “Washington Consensus”, in November 2004 you kindly published a letter in which I wrote:

“Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

So, there are two completely different bank systems:

Before 1988, one in which banks needed to hold the same capital against all assets, credit was allocated based on risk adjusted interest rates and the market considering the bank’s portfolio, accurately or not, values its capital.

After 1988, one risk weighted capital requirement banks where credit is allocated based on risk adjusted returns on equity, something which clearly depends on how much regulators have allowed their capital to be leveraged with each asset... clearly favoring government credit, which de facto implies bureaucrats know better what to do with (taxpayers') credit than e.g., small businesses and entrepreneurs. Communism!

Sir, I am of course just small fry, not even a PhD, but, if you have to choose between describing what has happened in the financial markets since 1988 as a “deregulation”, as Fukuyama opines, or an absolute statist and politically influenced misregulation, as Volcker valiantly confesses, who do you believe?

Sir, is this topic taboo… or just a too hot potato for the “Without fear and without favour” Financial Times?

PS. In Steven Solomon’s “The Confidence Game” 1995 we read: “On September 2, 1986, the fine cutlery was laid once again at the Bank of England governor’s official residence at New Change… The occasion was an impromptu visit from Paul Volcker… When the Fed chairman sat down with Governor Robin Leigh-Pemberton and three senior BoE officials, the topic he raised was bank capital…”

@PerKurowski

The history I’ll tell my grandchildren has little to do with Philip Stephens’ history.

Sir, Philip Stephens writes: “Twenty-five years ago… the world belonged to liberalism. Soviet communism had collapsed. Historians will record the 2008 global financial crash as… the moment western democracies suffered a potentially lethal blow. The failure of laissez-faire economics was visible before the collapse of Lehman Brothers.” “The west is the author of its own weakness” Financial Times, October 1, 2021.

The history I will be telling my grandchildren is quite different.

Thirty-three years ago, the world belonged to liberalism and Soviet communism was collapsing. Historians will record how in 1988, one year before the Berlin Wall fell, the western world’s bank regulators introduced risk weighted bank capital requirements that distorted the allocation of credit. That put an end to any laissez-faire economics. With risk weights of 0% the government and 100% citizens, as if bureaucrats know better what to do with credit than e.g., entrepreneurs, communism took over. 

The 2008 global financial crash resulted from banks being allowed to leverage their capital/equity/skin-in-the game a mind-boggling 62.5 times, with assets that human fallible credit rating agencies had assigned a AAA to AA rating.

Yes, the west is the author of its own weakness… it much renounced to the willingness to take risks that had made it great. 

Sadly though, there are way too many interested in not disclosing what really happened… and therefore our banks are still in hand of insane risk aversion. “Insane”? Yes, because those excessive exposures that could become dangerous to our bank systems, are always built-up with assets perceived as safe, never ever with assets perceived as risky.

PS. My 2019 letter to the Financial Stability Board

Spurn bank regulators' false promises.

Sir, Martin Wolf makes a good case for “We should not throw liberal trade away for the wrong reasons and in the wrong way”, “Spurn the false promise of protectionism” FT June 16.

Yet, when regulators, decades ago, decided to throw liberal access to bank credit, by imposing credit risk weighted bank capital requirements, something which completely distorted the access to bank credit, Wolf and 99.99 percent of those who should have spoken up, kept mum.

Though I’ve no idea whether they read it, in a 2019 letter I wrote to the Executive Directors and Staff of the International Monetary Fund, I argued that these risk weights are to access to credit, precisely what tariffs are to trade, adding “only more pernicious” 

Wolf writes that “the US economy has suffered from high and rising inequality and a poor labour force performance” and includes among other explanations the “rent-extracting behaviour throughout the economy”

But anyone who reads “Keeping at it” 2018 in which Paul Volcker’s 2018 valiantly confessed: “The assets assigned the lowest risk, for which bank capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages”, should be able to understand that rent-extraction also occurs by means of cheaper and more abundant access to credit.

And boy did regulators throw away unencumbered access to credit in “the wrong way”

Here follows four examples: 

To establish their risk weights, they used the perceived credit risks, what’s seen “under the street light” while, of course, they should have used the risks for banks conditioned on how credit risks were perceived. 

By allowing banks, when the outlook was rosy, to hold little capital, meaning paying high dividends, lots of share buy backs, and huge bonuses, they placed business cycles on steroids.

Very little of their capital requirements cover misperceived credit risks or unexpected events. Therefore, just as in 2008 with the collapse of AAA rated mortgage back securities, and now with a pandemic, banks were doomed to stand there with their pants down.

With risk weights of 0% the sovereign and 100% the citizens, which de facto imply bureaucrats know better what to do with credit they’re not personally responsible for than e.g., entrepreneurs, they smuggled communism/statism/fascism into our banking system.

“We will make your bank systems safe with our credit risk weighted bank capital requirements” Sir, what amount of wishful thinking must have existed for the world, its Academia included, to so naively have fallen for the hubristic promises of some technocrats.

@PerKurowski

What America (and much of the rest of the world) needs is to free itself from the clutches of statist/communist bank regulators.

Sir, Martin Wolf, opines that “Joe Biden may be a last chance for US democracy” “Competency is Biden’s best strategy” January 27. 

Oh, if only all was that easy and in Biden’s hands. When compared to what some dark hands through bank regulations are doing to America (and to much of the world), both Donald Trump and Joe Biden are small fry.

Paul Volcker in his 2018 autography “Keeping at it” wrote: “The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages”. Volcker continued with “Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011”. That compared to all other that has been said about and quoted from Paul Volcker, has been totally ignored, or outright censored. 

But what does it really mean?

Lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs. 

Lower bank capital requirements for banks when financing the central government than when financing local governments, de facto implies federal bureaucrats know much better what to do with credit than local bureaucrats.

Lower bank capital requirements for banks when financing residential mortgages, de facto implies that those buying a house are more important for the economy than, e.g. small businesses and entrepreneurs.

Lower bank capital requirements for banks when financing the “safer” present than when financing the “riskier” future, de facto implies placing a reverse mortgage on the current economy and giving up on our grandchildren’s future.

Sir, I just ask, would America have even remotely become the great land it is, if that kind of risk adverse bank regulations had welcomed the immigrants when arriving at Ellis Island / Liberty Island... to the Home of the Brave?

Wolf also uses new-confirmed Treasury secretary, Janet Yellen, to endorse what he himself have argued so many times namely: “With interest rates at historic lows, the smartest thing we can do is act big” Again, where would those historic low rated be without the Fed’s QEs and without the regulatory favors mentioned? Really? Historic lows or historical communist subsidies?

PS. Not the first time (nor probably the last) I've written to Martin Wolf on this.

@PerKurowski

The privileged subsidizing of sovereign debt that apparently shall not be named

Sir, let us suppose that as credit risks, banks perceived Martin Wolf and me as equally risky or equally safe. We would then, for the same amount of borrowings, be charged the same risk adjusted interest rate.

But then suppose that for whatever strange reason, regulators allowed banks to leverage much more with loans to me than with loans to Martin Wolf, and so banks would therefore obtain higher returns on equity when lending to me than when lending to Martin Wolf.

And also suppose that for some even stranger reason, Bank of England would buy my loans from the banks, but not those loans given to Martin Wolf.

Clearly the result would be that I would be able to borrow much more and at much cheaper rates from banks than what Martin Wolf could.

Would Martin Wolf in such a case opine that the higher interest rates he had to pay was the result of the market?

I ask this because Martin Wolf frequently makes reference to the very low rates that many sovereigns have to pay, and holds they should take advantage of it by borrowing as much as they can, in order to invest for instance in infrastructure.

And Martin Wolf seemingly refuses to consider those “very low rates” a consequence of regulatory favors of sovereign debts and QE purchases of it.

That distorts the allocation of credit in such a way that, de facto, regulators and central banks believe bureaucrats / politicians know better what to do with credit they’re not personally responsible for than for instance entrepreneurs. 

In the best case I would call that crony statism, in the worst outright communism. 

One day future historians will recount, and Paris’ Musée de L’Homme exhibit: “1988 Basel I: When Regulators introduced Financial Communism”

Do we have a banking system with banks as they are supposed to be?

Sir, I refer to your “Non-bank lenders will bear brunt of credit crisis”, March 25

John Augustus Shedd (1859–1928) opined: “A ship in harbor is safe, but that is not what ships are for”

But bank regulators paid banks with lower capital requirements to stay safe, thereby overcrowding “safe” harbors. As a result, those who had real reasons to stay in safe harbors, like many non-bank lenders, and were less prepared to do so, like many non-bank lenders, had then to take to the risky oceans.

You opine “we are in a better place today because regulators forced greater protections on the banking system” What greater protection? A measly 3% leverage ratio supposed to cover for misperceptions of risks, like 2008’s AAA rated, and unexpected dangers, like coronavirus? You’ve got to be joking.

You quote Ben Bernanke “If you do not have a banking system, you do not have an economy.” Sir, do we really have a banking system with banks as the bank’s we used to know, or as banks are supposed to be?

I mean, with zero bank capital requirements against loans to the government and eight percent against loans to citizens you do not have a free market economy, you have financial communism.

With lower bank capital requirements for residential mortgages than for loans to the entrepreneurs or SMEs, those who can create the jobs needed in order to service utilities and mortgages, you will not have a functional economy, and houses have morphed from being affordable homes into being the main risky-investment of way too many families.

Sir, for the umpteenth time the Basel Committee’s risk weighted bank capital requirements: guarantees especially large bank crisis, caused by especially large exposures held against especially little capital to assets perceived as especially safe, but one of which suddenly one turns out as especially unsafe.

If John A. Shedd was alive today he might have opined: “A ship is safer on the oceans than staying in  a safe harbor, which might become dangerously overcrowded.”

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

@PerKurowski

Central banks and regulators are wittingly or unwittingly imposing communism by stealth, at least in Japan.

Sir, you refer to that Bank of Japan’s holdings of government bonds are already at more than 40 per cent of the outstanding stock… and to “massive equity purchases” [by means of buying into the ETF market], and to“the government is the biggest beneficiary of the BoJ’s low interest rate policy” “BoJ risks falling out of sync on global easing” August 7.

Add to that the lower capital requirements for banks when lending to the government than when lending to citizens, and it all adds up to a huge gamble on that government bureaucrats know better what to do with credit/money than private enterprises. It sure sounds too much like communism by stealth for my liking. 

In 1988 the Basel Accord assigned 0% risk weight to sovereigns and 100% to citizens and we all believed that when in 1989 the Berlin Wall fell we had gotten rid of communism for good. How can the world have been so naïve? It will of course end badly.

@PerKurowski

Jesus said, “Put out in the deep”. Regulators tell banks “Fish in shallow waters… preferably from the shore”

Sir, Martin Wolf writes, “Mr Trump’s narrowly transactional approach, driven by ignorance and resentment, risks disaster” “Donald Trump’s war on the liberal world order” July 3.

I agree there is room for serious concern with respect to what President Trump might do but, for the time being, for the umpteenth time, much more than what he might be sabotaging the liberal world order, bank regulators already did.

This Sunday, in the Swedish church in New York, they read us how Jesus invited the Apostles to "put out into the deep" for a catch: "Duc in altum" (Lk 5:4). "When they had done this, they caught a great number of fish" (Lk 5:6).

With their risk weighted capital requirements for banks, more perceived risk, more capital – less perceived risk, less capital, the regulators de facto told our banks to fish in shallow waters… preferably from the shore.

To assign a 20% risk weight to a corporation rated AAA to AA, and 100% to an unrated corporation 100%, and "generously" permitting the possibility of risk weighing small entrepreneurs with only 75%, has absolutely nothing to do with a liberal world order.

Moreover to assign a 0% risk weight to sovereigns and one of 100% to citizens, reads just like a communist world order.

“Armoured by ignorance”? Indeed, those regulations guarantee excessive exposures to what is especially dangerous as it is perceived, decreed or concocted as safe; against especially little capital… in other words it dooms our banks to especially severe crises.

Good job Basel Committee!

@PerKurowski

Amazing! Simon Kuper calls a zero risk weight of government and a 100 % for the private, a “right’s cult of free markets”

Sir, Simon Kuper writes: “the right’s cult of free markets was the last surviving big idea. Then the financial crisis of 2008 killed it off almost everywhere outside the US Republican party.” “Small ideas are better than big ones” October 24.

That is simply not true. If we are going to talk about the biggest current idea, and that has been applied on a global scale, I would say that is the credit-risk weighted capital requirements for banks, an idea concocted by the Basel Committee. And its origin, the Basel Accord in 1988, set the risk weights for loans to governments at zero percent while the risk weight for loans to the private sector were set at 100 percent.

That BIG IDEA, discriminating with regulations against the citizen and in favor of the state, has survived the financial crisis, and is still up and running strong in Basel III 

If anything, the Basel bank regulations should be called, the product of a “left’s cult of controlled markets”.

PS. Of course small ideas are always better than big dumb ideas. 

@PerKurowski ©

The hard left in Greece should shut up. Unless absolute fools, it was communist bank regulators who took Greece down.

Sir, Gideon Rachman, as one of the possible games Greeks are playing writes: “Syriza is a coalition party and the hard left of the party is likely to split off if Mr Tsipras is seen to accept austerity in return for a new agreement with Greece’s creditors”, “Four games the Greeks may be playing” June 16.

Bank regulators have decided that banks need to hold absolute minimum capital when lending to governments (or sovereigns as these like to be called) when compared to what they are required to hold when lending to for instance SMEs. With that they allow banks to earn much higher risk adjusted returns on equity when lending to governments than when lending to the other deemed risky.

And with that regulators set up the trap that guaranteed that governments would, sooner or later, become over-indebted… and one of the first one to fall hard in that trap was Greece.

Since those capital requirements also imply that regulators believe that government bureaucrats can use bank credit more efficiently than for instance the SMEs, this has to mean that the regulators are either absolutely foolish statist technocrats… or hardline communists.

And so, if I was Mr Tsipras, I would be very careful about furthering relations with the hard left… who knows what other tragedies might come out of it.

Sir, whether current bank regulators are fools or communists, Greece, and the Western World at large, need to get rid of them... urgently.

@PerKurowski

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

William Coen. Do you really think that government bureaucrats use bank credit more productively that SMEs and entrepreneurs?

Sir, I refer to Laura Noonan, Caroline Binham and Barney Jopson reporting that “Basel group faces up to compliance challenge” May 26.

We read David Green stating that still to be answered “is whether the new regulations actually does what it was intended to do and whether the side effects are acceptable, whether they are intended or not”. And that is something that does not sound quite unimportant eh?

But then William Coen, head of the Basel Committee’s secretariat, tells us “We hear quite often about unintended consequences of our reform when, in fact, the effects of our reforms are actually fully intended; some just don’t like them”.

But here then is a question to Mr. Coen.

The Basel Committee uses credit-risk weighted capital requirements for banks were the weight of governments is 0% while the weight of SMEs and entrepreneurs is 100%... and that is something quite discussable, especially in these days when governments announce they need to use financial repression in order to impose informal haircuts on their obligations.

But worse, much worse, looked at from the opposite side, it tells us that the Basel Committee for Banking Supervision feels that the risk of bank credit not being used productively is 0% for government bureaucrats, and 100% for SMEs and entrepreneurs.

Is that really what you believe and have intended to say Mr Coen? Are you a communist?

@PerKurowski

The Basel Accord 1988 guaranteed hysteresis, economic Alzheimer. Was it because of regulators’ memory loss or ideology?

Hysteresis can be described as a permanent weakening of the capacity to respond as a consequence of memory loss… a sort of an economic Alzheimer illness.

Sir, Claire Jones mentions that, “Hysteresis’s first brush with economic fame was in 1986, when it was used by Mr Blanchard and Lawrence Summers to explain Europe’s last brush with high joblessness”, “Hysteresis’ returns to Europe as central bank frets over recovery” May 25.

In1988, with the Basel Accord (Basel I), regulators adopted the use of credit-risk-weighted capital (equity) requirements for banks and set the following risk weights: Lending to the government = Zero percent risk weight; and lending to the citizens’ SMEs and entrepreneurs = 100 percent risk weight.

Sir, with regulators displaying such a total loss of memory about the importance of the private sector; or ideologically engaging in such obnoxious manipulation and distortion of the bank-credit markets in favor of the public sector… of course hysteresis had to follow.

The consequences of such hysteresis are indeed nefarious. For instance, in 2012, it already caused me to have to write an Op-Ed titled “We need worthy and decent unemployments”.

But, to have the slightest chance to regain our economies’ memory and vitality, we need to denounce what happened and to remove those who block such efforts… whether for reasons of mental sickness or sick ideology.

@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?

Sir, sorry to be disrespectful but…are you all in FT statists, communists or simply daft?

Sir, Claire Jones, in “Eurozone jobless outlook points up fears of persistent stagnation” March 24 writes of “ECB projections, highlighting deep scars left by the bloc’s financial and debt crisis”. What is wrong with you all? Have I not explained it to you all in hundreds of letters?

Again: It has been more than 25 years since Basel I redirected banks to lend more to the public sector than to the private sector; and more than 10 years since Basel II also within the private sector, redirected banks to lend to those perceived as safe and to avoid the “risky”.

And that means effectively the Basel Accord has ruled that government bureaucrats, because they represent “an absolutely safe borrower”, are more capable to efficiently use bank credit and generate jobs than what the so “risky” SMEs and entrepreneurs can do.

If you really cannot understand what that signifies for the medium and long-term potential of an economy to generate jobs… you are either statists, communists or simply daft… I hope it is the latter.

Jones writes: “ECB believes government can dent unemployment by pressing on with making their labor markets more flexible and competitive.” That would help, but before you get rid of the regulators’ heavy hand guiding where bank credit should go, there’s really little to do. Unfortunately, ECB’s Mario Draghi, as a former Chair of the Financial Stability Board, is one of the guilty of the regulatory distortion… and so there is a reputational conflict.

PS. Do you still not understand that if bank regulations had not been tilted so much in favor of “the infallible sovereigns”, then Greece, no matter how much it shaded its accounts, would not have been able to rack up as much public debt as it did? Do you not know that if European banks had not been allowed to leverage their equity, and the taxpayer support they receive, more than 60 times to 1 when investing in securities that carried an AAA rating, that the subprime crisis might never have happened? And of course that same line of arguments explains much of the mishaps when lending to Icelandic banks or financing real estate in Spain. 

Sir, again, no bank lending to what was not perceived as safe and therefore did not allow banks’ to hold little equity, had anything to do with causing the crisis. Of course, after the crisis has broken out all suffer, and, so unfairly, the innocent “risky” usually suffer most of all. But that has to do with ex-post consequences and not with ex-ante perceptions.

@PerKurowski

Why worry about bank’s risk models, when the regulators’ own “standardized” risk weights are more than bad enough?

Sir, Laura Noonan writes about the regulators increased concern with how financial modeling by banks can influence their risk weighted assets and thereby the equity they need to hold, “Regulators push banks hard on capital ratio flexibility” March 16.

I care little for those discussions because as I see it, the regulators’ own “standardized” risk weights are more than bad enough.

In 1988, the Basel Accord, Basel I, approved that banks had to hold 8 percent in equity when lending to the private sector but the banks were allowed to lend to OECD’s central governments against no equity at all.

The introduction of such an amazing pro-government bias, I would even call it outright communism, distorted all common sense out of the allocation of bank credit to the real economy. And with Basel II in 2004 they made it worse. And now with Basel III they are digging us even deeper into the hole.

Perhaps, with luck, banks’ own risk models do not assign the same “infallibility” to the sovereigns as regulators do.

@PerKurowski

Future generations are and will pay dearly for regulators distorting bank lending in favor of sovereigns

Sir, I refer to Christopher Thompson’s “Risks lie in Eurozone banks’ government links”, February 10.

Thompson writes: “banks have boosted their profitability by using cheap ECB loans to buy government debt offering a higher yield. … An additional incentive is that holdings of sovereign debt do not incur any regulatory capital charge while, by contrast, loans to businesses would do.” 

And that is not exactly right. The capital (equity) requirements are not “an additional incentive” these are what make that operation possible. If banks had to hold as much equity against sovereign debt than against loans to businesses, they would not do this carry trade.

If banks had to hold as much equity against sovereign debt than against loans to businesses, they would not hold any sovereign debt at current rates… not in a million years.

The real risk of this regulatory discriminatory distortion is that governments are getting too much and paying too little for their debt, a subsidy paid initially by small businesses and entrepreneurs by means of less fair access to credit; and finally by the future generations that will suffer from the lack of real undistorted bank lending.

I qualify those regulations in favor of the sovereign simply as communism introduced by the backdoor.

PS. In 2004, in a letter published in FT I wrote: “bank supervisors in Basel are unwittingly controlling the capital flows in the world…how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector” and I now have serious doubts about the "unwittingly". 

Government spending should be based on transparent tax revenues, not on regulatory scheming.

Sir, Lawrence Summers’ admonishes to “Only raise rates when the whites inflation’s eyes are visible”, February 9. Since inflation is such a fuzzy variable, no one can be really sure though about what we are seeing when the whites of its eyes are not visible.

But one thing is for sure; Government’s do not deserve the current low interest rate on their borrowings… that is a hidden tax.

It is urgent we eliminate those risk-weighted equity requirements for banks which translate into a tax on the borrowings of small businesses and entrepreneurs, and a subsidy of the public sector’s. That leads to something much worse than deflation, namely to highly ineffective allocation of bank credit.

It all started when innocent foolish technocrats, or dangerous terrorists, with the Basel Accord, came up with the idea that banks needed to hold much less equity against loans to their governments than to citizens. That translated into requiring banks to hold much less equity against loans to be managed by bureaucrats not subject to such limitations as having to feel the money as theirs, than against loans in the hands of small businesses and entrepreneurs.

That was, de facto, to invite communism to come in through the backdoor. And so, if we need to keep interest rates low in order to stimulate the economy, let those apply to all and not especially to the public sector.

Margaret Thatcher, if explained the capital requirements for banks based on perceived risk would ask “Are you nuts? Accept defeat?

Sir, I have read many obituaries of Margaret Thatcher that attributes to her much of the bank de-regulations they blame for the current crisis.

I do not hold to know the whole story but, let me assure you that if someone would have asked her about the possibility of, by means of bank regulations, allowing the banks to earn immensely higher risk-adjusted returns on their equity, by sticking to financing solely “The Infallible” and keeping away from “The Risky”, the Iron Lady would most certainly have asked “Are you nuts? That sounds like a defeat and I do not recognize the meaning of that word" 

And if also told that the most infallible of “The Infallible” was to be the government, and that therefore banks could lend to it without any capital at all, leveraging without limits, she would also most certainly have asked “Are you a communist?