For the complexity of banks, regulating demagogues gave us the simple solution of risk weighted capital requirements

Sir, Martin Wolf writes that current “upheavals [2007-08 Crisis, Great Recession] have, as so often before, opened the way to demagogues, promising simple solutions to complex problems… Brexit… Trump…Catalonia”, “A political shadow looms over the world economy” October 14.

Indeed, but much of the upheavals were caused directly by the members of an exclusive mutual admiration club of populist regulators, who sold the world that monumental piece of demagoguery of risk-weighted capital requirements for banks. “You all relax… we have weighted the risks.”

And though they never defined explicitly the purpose of banks, because seemingly they do not care about that, implicitly, de facto, their risk-weights indicate what the banks should do, and what not. That is so because less capital, means higher leverage, which means higher risk adjusted returns on equity.

So now we have: thou shall lend to sovereigns, to members of the AAArisktocracy and to finance residential houses; and thou shall not lend to risky SMEs and entrepreneurs.

And when the first results of those regulations, the excessive exposures to AAA rated securities, and to sovereigns like Greece appeared and caused crises, they did not rectify, they kept their risk weighting, and their central bank brothers kicked the cans down the road with QEs and ultralow interest rates.

So look at the stock market going up while becoming riskier because of the de-capitalization that results from taking up loans to pay for dividends and buybacks.

So look at house prices being overinflated, as evidenced by the lagging of rental values; while central bankers turn a blind eye to house prices not being in the consumer price index, but that rentals are.

So look at how sovereign debt levels are growing almost everywhere.

The monstrous silence about the distortions produced by bank regulations, like by influential opiners like Martin Wolf, is only helping to generate even more nutrient ingredients to all too many populists in waiting. God help us!

@PerKurowski

PS. My 2019 letter to the Financial Stability Board (FSB)

Though redistribution profiteers believe it and demagogues want you to believe it, there are no “huge piles of cash”

Sir, the word “cash” appears 8 times in Eric Platt’s “US tech cash pile soars to $504bn as groups seek to avoid tax hit on profits” May 21. And huge cash piles are referenced to in terms of “companies hoarding cash”. 

All as if it was some cash stacked away under some mattresses. Its not, there might not even be a single dime of cash; most and perhaps all of it has already been deployed to do something; it might be invested in shares or bonds, perhaps even in long-term municipal infrastructure bonds  J   

And so what should these “cash hoarders” that currently do not want to take investment risks do? 

  

Why do not bank regulators start with ending their risk-weighted capital requirements, those that effectively tell banks not to take risks but to keep it safe?

Sir, the truth is that legions of dumb redistribution profiteers searching for business opportunities, believe there are plenty of Ali Baba caves to be found.

And the problem is that demagogues and populists, like our Chavez and yours whoever, use that to further their own causes. FT, stop collaborating with them!

@PerKurowski ©

Martin Wolf should be careful throwing stones at “short-sighted elites”. He is part of it.

Sir, Martin Wolf writes of the “failings of short-sighted elites” “An elite at the mercy of its own creation” May 17.

I fully share the serious concerns Wolf expresses, though I do believe he points the finger way too much at the Republican elite, forgetting that it really takes two to tango.

But, that said, when it comes to blaming short-sighted elites, I must point out that Wolf himself should be very careful with throwing stones

Banks are currently required to hold more capital against what is perceived as risky than against what is perceived, decreed (sovereigns) or concocted (AAA securities) as safe. And that allows banks to leverage more their equity with what is safe than with what is risky. And so that allows banks to earn higher risk adjusted returns on equity with what is “safe” than with what is “risky”.

That sets up the banks to dangerously overpopulate existing safe havens; and that stops banks from exploring risky bays where new sources of growth and job opportunities for the next generation could be found. And if that is not short-sighted what is?

And Martin Wolf, one who we can guess considers himself as part of the elite, has preferred to ignore or to keep mum on the dumb credit risk aversion of the absolutely useless bank regulators hauled up in the Basel Committee.

Had Wolf helped to point out the dangers of such shortsighted regulations; the QEs and other such stimulus would not have been so wasted; the economy could evidence some signs of hope; and so there could be much less of that discontentment that facilitates the job of demagogues.

PS. In case Martin Wolf needs a refresher on Basel madness this aide memoire might be helpful

@PerKurowski ©

How do you protect your portfolio from the technocratic populists and demagogues, like those of the Basel Committee?

Sir, Gillian Tett writes about populism, protection and regulations and tells us “Protect your portfolio from the populists” May 6.

And so I would ask her how could we protect our portfolio from the populism and demagoguery of our bank regulators, the Basel Committee and friends?

With the risk weighted capital requirements they tell us they are making our banks safer. Just the term “risk-weighted” transmits the notion that risks have now been cleared for.

I can see a regulator standing there on a balcony in Basel and, in the best Peron style, voice out loudly “We will risk-weigh, we will risk-weigh, we will risk-weigh your banks”. And I can also see the audience, including too many from FT, fascinated, in trance, responding with admiring and adoring “Viva!”

But the only thing that risk-weighing does, is to allow banks to earn higher risk adjusted returns on equity for assets perceived, decreed or concocted as safe than for assets perceived as risky. And so that means banks will now lend too much and at too low rates to the “safe” and too little at too high relative rates to the “risky”.

And it is all so sadly stupid, because if there is any risk already weighted for in banking that is the perceived credit risk.

And so if understanding that this distortion of the allocation of credit will be bad for the real economy, and that, sooner or later, some safe-havens will become dangerously overpopulated, what does one do?

Of course while technocrats with QEs, negative interests and similar insist on stimulating the economy, the value of many assets, those not included in inflation basket, will inflate. But, long term we know that without a sturdy real economy to back these assets up, these will also suffer.

Sir, no matter what Ms. Tett might think, I assure you it is probably much easier to protect your portfolio against ordinary populists, than against these the technocratic populists and demagogues.

"We will risk-weigh your banks!"

"Peron, Peron, Peron!"

@PerKurowski ©

What a government spends is a lousy proxy for what the citizens receive; it ignores redistribution costs and profits

Sir, Tim Harford writes that the idea of a universal basic income “appeals to three types of people: those who are comfortable with a dramatic increase in the size of the state, those who are willing to see needy people lose large sums relative to the status quo, and those who can’t add up.” “Could an income for all provide the ultimate safety net?’ April 30.

And while doing so he uses figures for UK’s social security spending of £217bn, and on health and education spending of £240bn. 

Over the last 15 years the poor in Venezuela have most surely received less than 15 percent of what they would have received, had only the oil revenues been shared out equally among all citizens as a universal basic income. In such a case, supporting a net oil revenue funded universal basic income could be done by someone like me, someone who wants the state to become much smaller, who wants poor people to obtain more, and who can add quite well.

The basic mistake the undercover economist makes in this case, is that he equates all social support received by the needed with what is spent on them. That ignores the redistribution cost and profits. A universal basic income, that would put aside in different account much of the redistribution, would help bring more transparency to what the real cost of real government’s functions are. In these Panama Paper days, when so much concern is expressed on the issue of tax evasion and tax avoidance, there is little mentioning of the possibility that pure tax revenue waste could add up to much more.

Many wealthy non-leftists do harbor serious concerns about the growing income inequality, not only because of a sense of justice, but also because they know it could come back to haunt them. And so for them, a universal basic income distribution of a pro-equality tax, and which would not have to cost more than 2 percent in administration fees, might seem as a quite reasonable way to go.

Also many of us concerned with climate change but who also do feel quite uncomfortable with all the climate change profiteers who surround most initiatives, could find a huge gas/carbon tax paid out by means of a universal basic income scheme much better. For a starter it would beautifully align the fights against climate change and inequality.

And please, whenever I mention “redistribution profiteers’, I do not only refer to those who get cold cash and favors, but also to those so much worse, those populist and demagogues who take out their share in political power.

By the way here is a question for the Undercover Economist: Would our economies be better or worse had the QEs been redistributed in equal shares to the citizens?

PS. The problem with governments is not they are monopolies. It is they are operated and exploited by too many monopolists.

@PerKurowski ©

Tett, get it! What is stashed away in offshore centers, is mostly titles of ownership to onshore assets

Sir, Gillian Tett writes: “Four years ago, activists’ group… claimed that some $21tn-$32tn was being stashed in offshore centres, but it had no real way of verifying the numbers. With the Panama Papers being studied, more precise figures could emerge — and with that the ability to compare them with the overall picture of global banking.” “Our mental map of the banking world may be about to flip” April 16. 

Does Tett really think that $21tn-$32tn could be stashed in offshore centers? Has she ever heard of banks in offshore centers to be jointly as large than perhaps all the 15 largest non-Chinese banks put together? Does she not realize that Mossack Fonseca is just a big law firm?

In truth, save perhaps one apartment here, or some yacht there, nothing real is stashed away in Panama or other offshore centers. What is stashed away there though, are titles of ownership over assets stashed away primarily in the developed world. It could be deposits at Citibank, a title over a flat in London, stock certificates or whatever.

The whole affair reminds me of the confusion about Eurodollars that made many sudden-experts believe in the existence of some autonomous dollars traded in Europe. What was traded, were all dollar deposited in the USA. That had started in the late 50s when Russia, scared of the possibilities of having their dollars confiscated, had a British chartered bank take over its dollar deposits in the USA, against a “Eurodollar” deposit of Russia in the British bank.

But does it all not sound nice? Over there are $21tn-$32tn stashed away, and so if only we got it back, we would all be so much better off. Sir, Tett is unknowingly helping to feed that cheap populism that has all redistribution profiteers salivating. I truly think we all deserve better.

PS. Does this mean I condone less than anyone else those criminal activities that might often be behind the hiding of the real ownership of assets? Of course not! And you know it!

PS. Redistributing wealth is not as straightforward as redistribution profiteers want us to think.

@PerKurowski ©

The Undercover Economist surfaces timely to help put some stop on dangerous divisive demagoguery.

Sir, Tim Harford writes: “If the rich and powerful are dodging taxes or committing financial crime, they deserve to be exposed. And if a $160bn merger makes sense only if it qualifies for a juicy tax break, it should not happen. If politicians and voters are finally taking an interest in closing tax loopholes, that is good… Yet there is also something disheartening about the name-and-shame, patch-and-mend turn the conversation has taken.” ‘Naming and shaming is no way to build a tax system” April 9.

What can I say? I guess: “Hear, hear!” applies the best.

And next week I hope the Undercover Economist helps to explain that what is to be found there in the stash-away is not some unused treasures type Ali Baba and the 40 thieves, but papers that evidences how values have already been deployed, like for instance buying shares or government debt.

I ask this because when we read articles that state “The Panama Papers Show That There's Enough Money to Solve the World's Problems - It's Just in the Wrong Hands”, it is clear that truth is bended in order to serve populism, and that redistribution profiteers are smelling great opportunities for their Rightful Hands.

@PerKurowski ©

Do Gillian Tett and other really believe that ever-growing offshore cash piles, is cash stashed away under mattresses?

Sir, Gillian Tett writes: “overseas profit piles have swelled — to more than $2tn”; and from there she jumps to: “in the real world introducing a repatriation deal — even at a mere 10 per cent — would almost certainly be better than the dismal status quo: a world of ever-growing offshore cash piles, transatlantic tax battles and lousy infrastructure does not suit anybody.” “The clampdown on tax inversions is only a start” April 8.

But Vanessa Houlder informs: “Over $1tn of cash has been booked offshore, even if the money is held in US banks or Treasury bonds.” “Tax havens seen as ‘grease on wheels’ of cross-border trade” April 8.

All those “overseas profit piles” have, in some way or another, already been deployed and so, to redeploy these, means having to liquidate their current positions.

What if the “more than $2tn” had all been invested in public debt and you repatriated all of it and the government got a 10 percent cut on it?

Then of course governments would owe ‘more than $200bn’ less, but if they for instance wanted to better any “lousy infrastructure”, then they would have to sell fresh public debt in the market. And, since the stockpile-holders have been diminished, that would most certainly imply having to pay higher interest rates. That is of course, unless governments are not assisted by banks holding it against zero capital requirements, or central banks buying up public debt for the governments own “stockpiles of cash”.

It is amazing the kind of demagoguery that is floating around. It is dangerously divisive. At the end of the day what it really comes down to, is who is going to decide on how any accumulated wealth is to be redeployed, whether the private or some government bureaucrats.

I truly believe that current governments waste, represents much more lost value than what is inappropriately or illegally diverted into these oh-so-horrible “stockpiles of cash”. And so I would like to see the expected repatriation profiteers kept at bay. Perhaps all citizens in some Universal Basic Income/Wealth scheme could share the governments’ cut of any repatriated assets?

And by the way, what are we to do with Putin’s “stockpiles of cash”, those that might be fully invested in the US? Send it back to Russia to Mr Putin?

Do these comments mean that I condone what distorts or what is illegal? Of course not! All tax systems should be improved and all taxes should be paid! There are occasions though in which I find it quite relevant to ask: How much failed nation or tyrannical government is needed for citizens’ capital to be granted immediate asylum?

With respect to inequality it behooves us all to stop demagogues from opening appetites that cannot be satisfied

Sir, Tim Harford adds valuable elements to Piketty’s r>g inequality discussions, those that have so many redistribution profiteers drooling in anticipation. “Capital ideas in a time of inequality” March 19.

To Harford’s initial discussions on rates of returns we must keep in mind that the ownership of the capital measured, might be constantly changing. And it is very hard to statistically reflect the continuity value after discontinuities like wars, and other potential wipeouts and resets. And the effect of the survivorships bias on returns, though very hard to measure, might be huge over time.

When it comes to this issue of growing inequality, which is serious indeed, I have always been more for analyzing what could be distorting the allocation of wealth, and in how we can open up opportunities for all to participate in its creation.

And since from the evidence it seems we do need a pro-equality tax on wealth, it is also important to make certain that the redistribution is done in a cost effective way. In my country, Venezuela, I always propose that our net oil revenue should be shared out to all citizens, instead of being concentrated in some political besserwissers’ hands. In this respect it is with a lot of enthusiasm I now follow the idea of universal basic income being studied in Finland and lately in Canada.

But, in all this debate, instead of referring to measured balance sheet wealth, should we not better always think in terms of realizable and transferable wealth? For instance, what about all that wealth stored in art hanging on private, or stored away in the cellars of public museums? If we want to transfer part of that value to the poorer in any significant way, how do we proceed? I mean this is very important, because to open up appetites, ignoring these cannot be satisfied, is precisely what dangerous demagogues do.

Friends, if we had managed to keep the profiteers out of the redistribution, would not the current inequalities be lower? Should not redistributing income and wealth max cost 2 percent?

@PerKurowski ©