Where would Philip Tetlock or Robert Armstrong forecast the next bank system-threatening crisis to appears

Sir, I refer to Robert Armstrong’s lunch with Philip Tetlock, ‘It doesn’t matter how smart you are’, July 9.

How I would have loved being at that table and be able to ask them:

Gentlemen, where do you think the next major bank crisis resulting from excessive exposures to something really bad is going to happen, between something that was perceived as safe when incorporated to bank’s balance sheets, or between something that was ex-ante perceived as risky?

And applying simple common sense, and looking at empirical evidence, I would absolutely forecast the first, that what’s perceived ex-ante as safe is, ex-post, the much riskier.

And I ask this because our current regulators, with their risk weighted capital requirements for banks, forecast that what is ex-ante perceived as risky, is ex-post, what is truly dangerous.

In my mind they never heard of Voltaire’s “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]”

And the biggest problem now is that, though the regulators were clearly proven wrong in 2007-08, they do not admit their mistake and they keep on forecasting the same.

Sir, if artificial intelligence is to help us, we must keep it free of weak human egos.

@PerKurowski ©

And now, decades too late, FT publishes an article by LBS’s David Pitt-Watson mentioning that finance needs a purpose

Sir, David Pitt-Watson, an executive fellow of finance at London Business School writes: “Few had spotted… chronic failures in the system; for example, that on the best evidence available, for more than a century, the financial system has created no productivity increase in its task of taking our savings and investing them in productive projects”. And “that’s why LBS has introduced a new required course for its masters in finance, [which he teaches] called the Purpose of Finance.” “Students must learn the purpose of finance” June 20.

I am a London Business School, Corporate Finance graduate, 1980. Since my first Op-Ed in 1997, and then as an Executive Director of the World Bank 2002-04, and afterwards, I have held, among other in around 50 not published letters to FT, that bank regulators, so irresponsibly, never ever defined the purpose of banks before regulating these, and so completely ignored that the main purpose of banks was to allocate efficiently credit to the real economy.

In 2007 I even sent a letter to FT commenting on an article by David Pitt-Watson, in the sense that he had not understood the role of regulators in creating the distortions in the allocation of bank credit.

My problem was, and is, that I did, and do not, belong or behave, in accordance to the mandates of any inner circle, whether of LBS or FT.

Therefore when Pitt-Watson writes: “Before we launched the course, I researched what other masters in finance degrees taught. I could not find a single one that is explicit in teaching about purpose,” he is confessing to the worst of problems… the groupthink of regulators, of finance professors and of financial journalists.

I am pinning my hopes on artificial intelligence. That has at least no ego that refuses to admit to its mistakes.

And artificial intelligence would never ever have risk-weighted BB- rated assets at 150% and AAA rated at 20%. It would have known that banks would never ever create excessive financial exposures to what is perceived as risky, that only happens with assets ex ante perceived as safe.

@PerKurowski ©

FT, are you aligned with the interests of redistribution profiteers and besserwissers, or with citizens’?

Sir you refer to that “Next month, Switzerland will hold a referendum on whether to introduce an Unconditional Basic Income”, and then you opine “this measure seems premature today [though] it is worth running data-driven pilot projects to test the concept’s future viability. More effective tax regimes and smarter forms of wealth redistribution will be needed to ease our social strains.” “Bring on the robots but reboot our societies too” May 7.

I come from Venezuela, where the poor, from that so lauded 21st Century Socialism, have not received more than about 15 percent of what should have been their individual share of the fabulous oil revenues over the last 15 years, tops. So please don’t tell me an unconditional universal basic income, in this case funded by oil revenues, “seems premature”… it is way overdue.

And Sir, why do we really need to test the hypothesis that people know better what to do with their own resources than what the governments with other’s resources? Is that to find ways to help profiteers and besserwissers to keep control over the redistribution?

As I have written to you I support a worldwide gas/carbon tax which revenues should be paid out by means of a universal basic income, in order to align the incentives in the fight against climate change and against inequality.

And I also support a social pro-equality tax, which revenues should be paid out entirely by means of a universal basic income, from citizens to citizens, so as to avoid all the dangerous populist and demagoguery intermediaries.

Sir, if we can separate all the redistribution from governments’ normal functions, then we will also be able to make these perform better for us. For instance, we might suddenly realize that all tax evasion and tax avoidance put together could be less than government waste.

PS. And bring on the robots to bank regulations. These at least have smaller egos that stand in their way of admitting and learning from their mistakes. The robots would, long ago, have eliminated the risk weighted capital requirements for banks, which only dangerously distort the allocation of bank credit to the real economy, for absolutely no good reason at all. 

@PerKurowski ©

Artificial intelligence has a clear advantage over humans; a smaller ego standing in the way of admitting mistakes.

Sir, Murad Ahmed, writing about Demis Hassibis states: “At DeepMind, engineers have created programs based on neural networks, modeled on the human brain. These systems make mistakes, but learn and improve over time” “Master of the new machine age” March 12.

Ooops! I hope they do not use as models the brains of current bank regulators.

In 2007-08 we had a big crisis because AAA rated securities and sovereigns like Greece, perceived and deemed as safe, turned out to be very risky.

And what connected all that failure, was the fact that banks were allowed to hold very little, I mean very little, we are talking about 1.6 percent or less in capital, against those assets, only because these were ex ante perceived or deemed to be very safe.

Of course, anyone who knew anything about the history of financial crises would have alerted the regulators that to allow banks to have less capital against what is perceived as safe than against what is perceived as risky, was very dumb. That since major crises only result from excessive exposures to something ex ante perceived as risky but that ex post turns out to be very risky. And one of the main reasons for that is precisely that too many go looking for “safety”.

But now we are in 2016, and the issue of the distortion those capital requirements produce in the allocation of bank credit to the real economy is not yet even discussed. 

So before these human brain systems learn and improve over time from mistakes, they have to be able to understand these and, more importantly, to humbly accept these.

Frankly, artificial intelligence seems it could have an advantage over humans’, namely none of that human ego that so much stands in the way of admitting mistakes.

But also beware, were robots free of that weakening ego, they could conquer us!

@PerKurowski ©

Financial Times - FT: Sir, on the causes of the crisis of Greece, how about some journalistic honesty from yourself?

Sir, you write that “Ms Merkel has allowed the entire euro crisis to be portrayed within Germany as a fiscal mess caused by profligate peripheral countries. This analysis ignores the role of the financial bubble fuelled by banks — including Germany’s”. And then you title it as “The need for honesty in the crisis over Greece”, August 22.

But this Merkel analysis, and your analysis, ignores what I have been writing to you about in over a hundred of letters over the last decade, namely that the financial bubble fuelled by banks, was a direct result of Basel’s credit-risk weighted capital requirements for banks.

You know, because I do not believe you dumb, that had banks needed to hold the same capital they are required to hold when lending to any European SME or entrepreneur, 8 percent, instead of the 1.6 percent or less allowed by regulators when they lent to the Greek government, this Greek tragedy would not have resulted, no matter how much Greece might have manipulated its financial data.

You even published a letter of mine I wrote in November 2004 in which 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. 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 may I suggest it is high time for the Financial Times to also display some honesty over the causes of the crisis in Greece. Who are you covering up for? Is it perhaps for some too delicate big egos? Is yours really ethical journalism? Dare to live up to your motto!

http://teawithft.blogspot.com/search/label/Greece

@PerKurowski

Bad bank regulations in the company of big egos, hidden agendas and lack of accountability have our economies stuck in the doldrums

Sir I refer to Joseph Stiglitz’ review of Martin Wolfs’ recent book “The Shifts and the Shocks” August 29.

Stiglitz writes: “The problem is not an excess of savings but a financial system that is more fixated on speculation than on fulfilling its societal role of intermediation between those with excess funds and those who need more money, in which scarce savings are allocated to the investments of highest social returns”

Of course that is the problem. A financial system, in which perhaps its biggest agent, the banks, are given immense incentives to lend and invest based on perceived credit risks, something which has absolutely nothing to do with social or economic returns, cannot fulfill its role of intermediation.

But, those immense faulty investments are given, not by any market, but by regulators who, for instance in Basel II, constrained a bank to leverage its equity 12.5 times to 1 when lending little to a small business or entrepreneur, while at the same time allowing banks to invest huge amounts in members of the AAAristocracy, leveraging a mindboggling 62.5 times to 1. 50 times more!

Unfortunately, in a world in which most of the big brass opinion makers carry their own agendas, and which in the case of Martin Wolf and Joseph Stiglitz neither one include the possibility of regulators regulating too much nor regulating too badly, it is difficult for this truth to surface. 

Add to that the fact that regulators themselves, quite naturally, hate their outright stupidity to be known, and stubbornly refuse to answer questions about the distortions their risk-weighted capital requirements produce in the allocation of bank credit, and you will get a better feeling for how stuck in the doldrums our economies are.

Should I have been more careful my comments were more palatable to FT’s senior egos?

Sir, in “BoE’s self-criticism” November 11, you quote Bill Winters “gently” saying “[while junior staff] are often willing to challenge their superiors… there appears to be some tendency for them to filter recommendations in such a way as to maximize the likelihood that senior staff will find the recommendation palatable”. 

What is your own take on that? I myself have sent many recommendations and comments to you over the years and though I believe many of these were important different and should not have been ignored, but they were. Did I give too much credence to your motto “Without fear and without favour”? Should I have been more careful my letters and comments were more palatable to your senior egos and their friends? Do the egos have the right of blackballing? 

I mean should not FT’s commitment to truth be the same as the Bank of England’s? I mean, as a specialized media with a lot of readers, is not FT’s voice on critical issues as important or even more than BoE’s?