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”

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

America, warning, industrial policy fertilizes crony statism

Sir, Rana Foroohar argues that America has chosen “to support a debt-driven, two-speed economy rather than one that prioritises income and industry” “Plans for a worker-led economy straddle America’s political divides” June 9.

“Debt-driven” indeed, but that has mostly been by prioritizing the safety of banks and the financing of the government.

In 1988 the Land of the Free and the Home of the Brave signed up to a statist and risk adverse bank regulation system. The Basel Accord favors “the safer present”, for instance lending to the sovereign and financing the purchase of houses, over that of “the riskier future’, like lending to entrepreneurs. 

In 1988 when a 0% risk weight was assigned to it, the US debt was $2.6Tn. Now it is $22Tn, and still has a 0% risk weight. And just look at how houses have morphed from being homes into being investment assets.

There’s no doubt the report issued by Marco Rubio, as the chair of the Senate small business committee, is correct in that “the US capital markets had become too self-serving and were no longer helping non-financial business... and that public policy could play a role in directing capital to more productive places — away from Wall Street, and towards Main Street.”

But that does not mean the US, in order to “successfully compete with state-run capitalism” like China, has now to turn to industrial policy and thereby risk being captured by even more crony statism.

Regulators assigned a 20% risk weight to what, because it has an AAA rating could really create dangerous levels of bank exposures, and one or 150% to what is below BB- rated, and which banks do usually not want to touch with a ten feet pole. So why should we believe that governments who appoint such regulators, have better ideas than the market on how to funnel capital to the most productive places, connecting the dots between job creators and education.

Therefore the public policy most urgently needed is that of freeing America (and the rest of the world) from that public policy distortion of the allocation of bank credit, that which builds up dangers to the bank system, and weakens the real economy.

PS. Germany has benefitted immensely from so many eurozone nations helping to keep the euro much more competitive for it than what a Deutsche Mark would be. Therefore it is not really correct to bring up the “success” of Germany as an argument in favor of more state intervention.

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

@PerKurowski

Those who fell for the “We will make your bank systems safer with our risk weighted capital requirements” populism should not throw the first stone

Sir, Martin Wolf reviewing three books related to the rise of populism writes “Populist forces are on the rise across the transatlantic world … It may also prove to be a historical turning point, away from liberal democracy, global capitalism, or both.”“The price of populism” October 27.

Indeed, but to me that started some decades ago when bank regulators, as if they where clairvoyants, told us they could make our banks systems safe by imposing risk weighted capital requirements on banks. “Wow, risk-weighted, that’s sure scientific!” 

Sir, if that’s not populism what is? The world, FT and even Martin Wolf fell for it, lock stock and barrel.

Referring to Robert Kuttner’s “Can Democracy Survive Global Capitalism?” Wolf agrees when Kuttner mentions the “incompetent deregulation of finance, especially the growth of short-term cross-border capital flows and the plethora of regulatory loopholes.”

Really? When regulators allowed with Basel II to leverage 62.5 times with assets human fallible credit rating agency have assigned AAA to AA rating, what more loopholes do you really need?

Kuttner also argues against “the disastrous counter-revolution of the 1980s and the relaunch of deregulated capitalism” NO! What “deregulated capitalism” can there be when regulators assign a risk weight of 0% to the sovereign and one of 100% to the unrated citizens? That Sir is regulated crony statism.

@PerKurowski

Many “independent” central banks, like the Fed and ECB, are behaving as statism cronies

Sir, Michael G Mimicopoulos, when commenting on your editorial “The long bull market enters its twilight period” (October 13), writes“The debt of non-financial companies in the US, which has risen to 73.5 per cent of GDP, an all-time high… Companies have been borrowing money to buy back their own stock, to increase earnings per share rather than pay down debt.” “Fed should be viewed against its record” October 17.

Absolutely and that has been going on in front of Fed’s eyes; just like banks have been shedding assets which require them to have more capital, in order to show better capital to risk weighted asset ratios.

Fed independence? Central banks that approve of a 0% risk weighting of their sovereign with a 100% for citizens, keep interest rates ultralow, and launch quantitative easing programs purchasing loads of sovereign debt, can hardly be called independent, much more statism cronies.

@PerKurowski

What we have is not by a long shot economic liberalism, it is much more statism, and of the crony kind.

Sir, Martin Wolf refers to Yascha Mounk of Harvard University arguing “that undemocratic liberalism, notably economic liberalism, largely explains the rise of illiberal democracy: ‘vast swaths of policy have been cordoned off from democratic contestation’, [carried out] by international agreements created by secretive negotiations carried out inside remote institutions.” “Saving liberal democracy from the extremes” September 25.

Hold it there! The Basel Committee for Banking Regulations, with Basel I of 1998 decided, without any real public consultation, that the risk weights for those risk weighted capital requirements it itself concocted, were to be 0% the sovereign and 100% the citizens. What has to do with “economic liberalism”? Nothing! To me it is pure unabridged statism… that is unless it is derived from pure unabridged stupidity.

Ignoring that allows Wolf to opine, “What is true is that poorly managed economic liberalism helped destabilise politics… and to argue, “Elites must promote a little less liberalism” 

Again, no! Mr. Wolf (for the umpteenth time), we are not living a time of “poorly managed liberalism”, we are living thru times of expertly camouflaged statism, that which is so beneficial to the redistribution profiteers and to those of the private sector who love to engage in crony statism.

Sir, all journalists, even those considered its elite, have a duty to denounce that; less they might be accused of covering it up. I mean should not journalists be the citizens’ frontline for any “democratic contestation”? 

How many times have I asked Martin Wolf to use his influence to ask the regulators: “Why do you want bank to hold more capital against what’s perceived as risky and is therefore less dangerous to our bank system, than what is perceived as safe and that, precisely because of that, becomes so much more dangerous to it? Hundreds? Has he dared to ask it? Not that I know Sir. Though perhaps he just did not like the answer or the non-answer 

@PerKurowski

The one most worthy and in need of a “teachable moment” is the European Union itself.

Gideon Rachman“fears that Britain is heading towards what counsellors call a “teachable moment”, otherwise known as a traumatic experience that forces people (or nations) into a fundamental reassessment.” “Britain is poised to learn a hard Brexit lesson” September 25

To that purpose Rachman mentions, “Greece experienced not triumph but humiliation – as its government was forced to accept the bailout that it had just rejected.”

Indeed, but the one who would best have been helped by a “teachable moment”, that would be the EU itself; which could have happened if only Greek citizens had sued EC, for allowing banks to lend to the Greek sovereign against zero capital of their own, which of course doomed the Greeks to their tragedy.

Does Britain or any EU nation really want to end up like Greece? I believe not. For that not to happen all Europeans need to call out their authorities on much more, instead of silently swallowing EU’s marketing efforts; thankful for being able to freely visit each other; something that when you get down to it does not really require a European Union for it, as neither does free trading, as neither does being able to work or reside in any EU nation for that matter.

How long will techno/bureaucrats, in EU or anywhere be able to extortionate more power for themselves, or increase the value of their redistribution franchises, by offering the citizens goodies these could obtain by other simpler means?

For instance the day an unconditional Universal Basic Income is adopted, that day we will be able to rebalance much more power in favor of citizens and lessen that of those all who engage in the crony statism that is killing us slowly. 

Does a teachable Brexit moment preclude something very good coming out from it? I don’t think so; I have too much respect for the Brits. Perhaps they can even help to save EU.

@PerKurowski

Three reasons to break the bank-sovereign doom loop: Safety, market signals and fighting crony statism

Sir, Thomas F Huertas, when commenting on Isabel Schnabel’s “How to break the bank-sovereign doom loop” of August 29 presents good reasons for why impose some capital requirements on banks when holding sovereign debt, in order to make the bank system safer. “Bank holdings of sovereign debt need scrutiny” September 6.

But making the bank system safer is not the only reason for why that should happen. 

The fact that banks need to hold less capital against sovereign debt translates into a subsidy that: a. impedes the market to send the right interest rate signals on these debts and b. favors the sovereign’s access to bank credit over that of the citizens… something that could only be of interest to redistribution profiteers or those wishing to engage in crony statism.

The horrible problem regulators now have is, after painting themselves into a corner with the 0% risk weight how do you get out without detonating that sovereign debt bomb?

PS. In November 2004, in a letter published by FT I asked: “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?” August 29,  I sent FT the following letter commenting on Isabel Schnabel’s article. As I am considered obsessed with the issue, it was of no interest to the editor.

@PerKurowski

Privatizations of public services, which could have been very good, just ended up as cozy crony statism deals.

Sir, Hannah Roberts discussing privatizations in the Italy of 1990’s writes, “The state turned to private entrepreneurs, offering favourable terms to extract the maximum possible capital from the sale”, “Inquest on Italian privatisation” September 5.

I do not know much about Italy, but that describes perfectly the problem from which we in Latin America suffered a lot when many of our public services were privatized. The concessions, instead of being awarded to those who offered the best and cheapest services to the users, were awarded to those who offered the most immediate income to the redistribution profiteers of turn.

The government got the money, and we consumers were set up to have to repay all that money, at high expected return on equity rates, with higher tariffs or prices. It was, as I so often publicly denounced it, a hidden taxation through privatization.

Andrea Cioffi, undersecretary at the ministry for economic development and a Five Star senator is quoted with, “There has always been a tendency to favour big companies, backed by pressure groups. Italy in the 1990s was like Yeltsin’s Russia when public companies were given to the oligarchs. Everyone was looking out for their friends, rather than the public interest.” 

Sir, twice is “crony capitalism” mentioned in this piece. When are we going to use the correct term of crony statism?

@PerKurowski

Myths, and truths that shall not be told, is why so little has changed since the financial crash

Sir, Martin Wolf writes: “The financial crisis was a devastating failure of the free market… The persistent fealty to so much of the pre-crisis conventional wisdom is astonishing.” “Why so little has changed since the financial crash” September 4.

Myths and truths that shall not be told, so that regulators shall not be held accountable, is the cause of that, not the failure of markets that were not free by a long shot. Here follows some of the more important of these.

Lack of regulations: Wrong! Total missregulation. Regulators for their risk weighted capital requirements for banks used the perceived risk of banks assets, those that bankers were already clearing for, and not the risk that bankers would perceive and manage the risks wrongly. They seemingly never heard of conditional probabilities.

Excessive risk taking: Wrong! It was the regulators excessive risk aversion that gave banks incentive to build up excessive exposure to what was perceived safe.

Greece did it: Wrong! EU authorities did Greece in, when assigning a 0% risk weight to its debt.

But Wolf is correct when arguing, “Today’s rent-extracting economy, masquerading as a free market, is, after all, hugely rewarding to politically influential insiders”

Because yes, crony statism is all around us, beginning with the “We governments guarantee you banks, and then assign ourselves a 0% risk-weight so you need not to hold any capital when lending to us, and so then you can return the favor by lending to us. 

Sir, Wolf concludes: “If those who believe in the market economy and liberal democracy do not come up with superior policies, demagogues will sweep them away”. That is right! But let us not ignore that “We will make your bank systems safe with our risk weighted capital requirements” was and is pure unabridged besserwisser demagoguery.

PS. Of course journalists who refuse to ask regulators the right questions since they are scared that if they do they will never be invited to Davos and Jackson Hole gatherings are also part of the explanation.

PS. Here is an aide memoire on some of the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

Trade tariffs revenues should at least try to compensate those hurt the most.

Sir, John Authers writes of the facts of life that give “Free trade the strange ability to convince everyone, rich or poor, that they have lost by it”, “Nafta’s losers always drown out its winners” August 10.

Tariffs are used to supplant market decisions. Sometimes it could be good, like for instance when making sure your “Arsenal Of Democracy” is fabricated on homeland, but most often it is bad, only helping to enrich those capitalizing on crony statism.

Whatever, in any case there should be much more transparency on who are then going to decide, instead of the market, on the use of all revenues provided by the tariffs.

I argue this because, if for instance 100% of those tariff revenues went to finance a Universal Basic Income, then at least those most hurt would be partially compensated… and the redistribution profiteers would think less favorably of these tariffs.

@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

Crony capitalism, which is really crony statism, includes many crony relations with central banks and bank regulators

Sir, Mohamed El-Erian writes about Jackson Hole meetings 2017: “The symposium left open questions for markets that, given very profitable adaptive expectations, are conditioned to rely on central banks to boost asset prices, repress financial volatility and influence asset class correlations in a way that rewards investors and traders more.” “Yellen and Draghi had good reason for Jackson Hole reticence” August 29.

So instead of relying on the real economy, Mohamed El-Erian, and I presume all his colleagues operating in the financial markets, rely more on what central banks do.

That is so sad, especially since the risk weighted capital requirements for banks, hinders all central bank stimuli to flow where it should. We now have buyback of shares, dividends financed with low interest rate loans, house prices going up, but SMEs and entrepreneurs not getting their credit needs satisfied because the regulators feel these are "Oh so risky!"

El-Erian reports: “Janet Yellen, chair of the US Federal Reserve, and Mario Draghi, president of the European Central Bank — [told] politicians about the importance of financial regulation”

That only happens because politicians have not dared to ask regulators questions like:

Who authorized you to distort the allocation of bank credit in favor of those perceived, decreed and concocted, as “safe”, like sovereigns and AAArisktocracy, and away from the “risky”, like SMEs and entrepreneurs?

Where did you find evidence that those perceived as risky ever caused major bank crisis? As history tells us, these were always, no exceptions, caused by unexpected events, like those ex ante perceived as very safe turning up, ex post, as very risky. 

PS. Do bankers love these crony relations? You bet! Being able to earn the highest expected risk adjusted returns on equity on what is perceived as very safe, must be a wet dream come true for most of them. And besides, by requiring so little capital, and therefore having to serve much less any shareholders’ aspirations, there is much more room for their outlandish bonuses

@PerKurowski

Know the difference between ordinary private sector citizens and corporate leaders engaged in crony statism.

Sir, Rana Foroohar writes about “a role for corporate leaders who think about more than share prices… Some are calling on the private sector to take up the mantle of US leadership.” “Business can fill the leadership vacuum” August 21.

Boy, the aspiring Bill Gates and Mark Zuckerbergs of this world just got to love her. But, as I see it, many corporate leaders do not really belong to the ordinary real private sector, they are too much often just representatives and members of the crony-statism sector… as in “I called up Mike Spence, [then governor] reminded him the we were the biggest tech employer…”

Look for instance at those big banks loving it when they can leverage their equity manifold lending to “the safe”, like sovereigns and the AAA rated, and express no concerns at all with the fact that this stops them from lending sufficiently to the SMEs and entrepreneurs.

Do I disagree with Marc Benioff, head of Salesforce, when he states: “CEOs have to be responsible for something more than their own profitability. You have to serve a broader group of stakeholders — from employees to the environment — and when politicians don’t get things right, corporate leaders have to act”? Absolutely not! They have all the right to do so… but, any strengthening of corporatism, should also come with the label: “Warning, allowing corporate leaders to speak out too much for the ordinary private citizen’s interests, might be very dangerous for the health of society.”

PS. As another example look at a Goldman Sachs’ Lloyd Blankfein selling himself of as a responsible citizen, while at the same time he approves of financing dictators that odiously violate human rights. 

@PerKurowski

To sell the Paris Climate Agreement as a real solution to our pied-a-terre’s environment problems, that’s a disgrace

Sir, Pilita Clark writes: “Mr Trump has exposed the fragile nature of the Paris accord. Countries face no legal obligation to meet any emissions-reduction target in their national climate blueprints, including the US. Nor is there anything legally to prevent them from submitting weaker plans” “US dithering exposes fragility of Paris accord” June 1.

If so then all those who sell us the illusion of the Paris Climate Agreement being a real solution, are more in fault hanging on to it, than Trump reneging it.

I have of course not read the Agreement. Who has read it all? To me this type of global agreements too often just feeds crony statism. To me this type of global agreements becomes too often just another photo-op for politicians.

To have a chance to really dent the environmental problems of the world, we need to come up with incentive structures that are green-profiteers proofed. Otherwise we will most probably not be able to afford it.

My preferred solution is to send the right market signals by means of for instance carbon taxes, and distribute all those revenues to all citizens in order to compensate for the increased costs. That would help many citizens to contaminate less, while affording to do more of something else they could want.

Another example: The Economist writes: “Climate policy, a jerry-rigged system of subsidies and compromises, in America and everywhere, needs an overhaul. A growing number of Republicans want a revenue-neutral carbon tax. [Like the one I suggest] As this newspaper has long argued, that would not only be a better way of curbing pollution but also boost growth. A truly businesslike president would have explored such solutions. Mr Trump has instead chosen to abuse the health of the planet, the patience of America’s allies and the intelligence of his supporters.” “The flaws in Donald Trump’s decision to pull out of the Paris accord”, June 1.

The question is then: Why does The Economist not denounce the Paris Climate an Agreement for what it is, a political convenient illusion of a solution? Just because being against Trump trumps all other considerations?

http://ourpiedaterre.blogspot.ca/2017/04/solutions-that-share-out-all-benefits.html

@PerKurowski

Are taxes on petrol correctly used? Repatriation of what “cash”? End users/payers of infrastructure should be present

Sir, Gillian Tett, discussing the financing of president Trump’s plan for infrastructure writes: “One sensible, overdue step would be to raise the petrol tax to pay for infrastructure; another would be to use proceeds from repatriated overseas corporate cash.” “Private money might yet save Trump’s infrastructure plans” May 26.

First, more taxes on petrol just means that more money goes into the same fiscal pocket to be channeled in often quite non-transparent ways to uses that might or might not include the building of infrastructure. The best use of taxes, such as those on petrol, which by the way constitutes de facto a discriminatory import tax on gas, is to transparently help fund a Universal Basic Income scheme.

Second, “cash”, what cash? Could Ms. Tett believe that high denomination bills stored under corporate treasurers’ mattresses represent that cash? Before opining anything about what “cash” could do, I suggest she finds out how that “cash” is currently deployed. Who knows, it might all be invested in gilts.

Finally, I have witnessed decent privatizations and infrastructure PPPs in my life, but I have also seen those that are only ugly expressions of crony statism. In this respect at the negotiation and executions phases of any privatization, any public infrastructure project, or any PPP, future users, or otherwise payers for the projects or the services, should be present… and their names publicly recorded as having represented the citizens.

Too often most of us see something very wrong that makes us reflect: “This would not have been the case had my grandfather or grandmother overlooked what was going on.”

@PerKurowski

Our “free market capitalism” is just the frosting on a statist cake baked by bank regulators in 1988.

Sir, Yuval Noah Harari writes: “Since 1989 elites in the west have come to believe in the “end of history” narrative, according to which liberal democracy and free market capitalism have won over all rival social systems, and the world is therefore bound to become a global community managed through free markets and democratic politics.” … However, since the global financial crisis of 2008 people all over the world have lost faith in the liberal recipe.” “At last, liberals are waking from a long dream” January 7.

That is indeed the conventional version, but “The truth is, so many don’t understand what’s going on in the world.”

In 1988 and in 2004, with Basel I and Basel II, regulators introduced risk weighted capital requirements for banks which allowed banks to leverage almost limitless when lending to the Sovereign, much, like 60 to 1, when lending to the safe AAArisktocracy, and only about 12 to 1 when lending to the “risky” We the People, like to SMEs and entrepreneurs.

Harari opines “the coming years might well be characterised by intense soul-searching and by attempts to formulate new social and political visions. Indeed, liberalism might yet reinvent itself”

If that is to happen, then the first order of the day for those aspiring to qualify as elite, is to understand how they so completely missed out on how these regulations would distort the allocation of bank credit to the real economy, foremost favoring governments.

Elite, where do you think the western world would be had these regulations been applied to banks during the 600 years before the Basel Accord?

Elite, what do you think Medici and many other bankers would have thought about 0 percent risk weight assigned to the Sovereign?

Elite, do you think the subprime or the Greek mess would have happened if banks were required to hold, for instance, 10 percent in capital against all assets? 

Elite, do you understand how this regulation decrees inequality?

Elite, as is don’t you think crony statism is a more clear definition than crony capitalism?

Elite, why do you think I cannot get an answer from regulators on some very basic questions?

Elite, why do you think the Financial Times will not publish this letter?

@PerKurowski

Martin Wolf, what do we call those who exploit elites’ intellectual laziness? Aren’t they also demagogues?

Sir, I refer to Martin Wolf’s “Democrats, demagogues and despots”, December 21.

If a demagogue is “a leader in a democracy who gains popularity by exploiting prejudice and ignorance among the common people, whipping up the passions of the crowd and shutting down reasoned deliberation”, what do we call those that though with more discretion and elegance, do the same among the elite?

In this case I refer directly to those who promise: “We will make the banks safe, because we will force these to hold more capital against what is perceived as risky than against what is perceived as safe”, and are then believed, by for instance many prestigious columnists.

Is that not exploiting a prejudice against those who anyhow, precisely because they are perceived ex ante as risky, already find it harder and more expensive to access bank credit, and therefore pose no major risks ex post to banks?

Is that not exploiting a prejudice in favor of those who anyhow, precisely because they are perceived ex ante as safe, already find it easier and less expensive to access bank credit, and could therefore really pose major risks ex post to banks?

Is that not exploiting the ignorance or naiveté of those who believe regulators could make banks safe without affecting their social purpose of allocating credit efficiently to the real economy?

Of course technocratic demagogues do not operate within any type of democracy, far from it, most often mumbo jumbo and research papers suffices to impress. And of course they are no despots, at least not wittingly.

Like Martin Wolf I do feel very uncomfortable with recent developments. Clearly Brexit needed not to be, and Trump does not fit the profile of what we have grown accustomed to at least hope for as that of a president in the USA.

But the elite must accept it is very much responsible for what is happening. Just for a starter it has allowed many technocratic tribes, like in Brussels and Basel, to operate unencumbered for way too long. It would seem the “elite” has relinquished its responsibilities and now prefers to live in the comfort of blissful ignorance.

If in doubt, just see the difficulties I have had trying to get straight answers to some very basic questions.

The world is under the siege by growing environmental problems, by robots taking jobs, by fake news because truth is not competitive enough, by terrorism and growing violence, by crony statism, by facing excessive debts everywhere… and by much more. Sir, where is your elite?

@PerKurowski

Why is obvious crony statism referred to as crony capitalism?

Sir, I refer to Martin Wolf’s “Why Xi cannot succeed with his reforms” December 14.

In it, Wolf quotes the following from Minxin Pei’s “China’s Crony Capitalism”: “The emergence and entrenchment of crony capitalism in China’s political economy, in retrospect, is the logical outcome of Deng Xiaoping’s authoritarian model of economic modernisation… because elites in control of unconstrained power cannot resist using it to loot the wealth generated by economic growth.”

But “Capitalism” (at least according to Wikipedia), “is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. In a capitalist market economy, decision-making and investment is determined by the owners of the factors of production in financial and capital markets, and prices and the distribution of goods are mainly determined by competition in the market.”

Sir, so why does it refer to “crony capitalism” when it is clearly much more a case of “crony statism”? Could it be that the “unconstrained power of the elites” also cover the terminology we are to use? Like for instance when references are made to our economies being under the yoke of “neo-liberalism”, all while bank regulators gladly risk-weigh Sovereigns with 0%, and We the People with 100%. Or like when intrusive and complex bank regulations are mentioned to have happened in a period of "deregulation".

PS. Here is the current summary of why I know the risk weighted capital requirements for banks, is utter dangerous nonsense.

@PerKurowski

Italy would have been far from as troubled as it is, if regulators had not distorted bank credit.

Sir, Mariana Mazzucato writes: “Increasing investment is essential to Italy’s future, as is fundamentally changing public-private relationships to make them less focused on favours and subsidies, and more on transformational opportunities”, “Italy’s future growth hinges on new ways of doing business” December 13.

Let us be clear. Most true “transformational opportunities” arrive by means of the market, and many “transformational opportunities” is just a code word for crony-statism profiteering.

There is one major fact that is being constantly evaded in the debate about Italy’s and most other economies. That is the distortion the risk weighted capital requirements for banks cause in the allotment of credit to the real economy.

Italy would never have accumulated so much public debt, had it not been for the false market signals that resulted when the Basel Committee decided to assign a zero risk weight to the sovereign and one of 100% to We the People, that which includes SMEs and entrepreneurs.

De facto those risk weights translate into a belief by regulators that government bureaucrats know better what to do with bank credit than the private sector… something that unless you are a runaway statist, make no sense at all.

Even at this point, according to Basel II’s standardized risk weights that are still being applied, the weight given to the Italian public sector debt is lower than that of most participants in that real economy that represents Italy’s best chance for the future. Especially when bank capital is very scarce, like now, any little difference in capital requirements means a lot.

Italy and all other have no chance of regaining some rationality in the allocation of bank credit, unless this lugubrious piece of regulations is eliminated.

Obviously, you cannot make the changes all at once, without severely affecting bank credit. But grandfathering previous capital requirements for existing assets, on the margin, for all new bank assets that regulatory discrimination must stop.

PS. Let’s stop talking about crony capitalism when obviously, what is happening, is crony statism.

@PerKurowski