When experts on different aspects collaborate they should be able to disagree, not just join a mutual admiration club.

Sir, Tim Harford writes about “a flawed statistical study by Winston Churchill’s scientific adviser Frederick Lindemann that no one had both the technical skill and the political clout to challenge. [It caused] the allied bombing of dense urban areas in Germany during the war, which not only took a terrible toll on civilians but failed in military terms by sparing industrial targets.” “Real change requires experts to collaborate” May 4.

There is a document prepared by the Basel Committee on Banking Supervision dated July 2005 and titled “An Explanatory Note on the Basel II IRB Risk Weight Functions". It can be found on the web site of the Bank for International Settlements.

It is supposed to explain the standardized risk weighted capital requirements for banks decided upon in the Basel II agreements. It does nothing of that sort, mostly because those risk weights are impossible to justify.

For instance assets rated AAA to AA rated, which ex ante perceived safety could cause banks to build up excessive exposures that could be dangerous to the bank system if these turned out ex post risky are assigned a 20% risk weight while; for assets rated a below BB- and that because of their perceived riskiness banks will not voluntarily build up excessive exposures to, and therefore represent no risk to the bank system, even if they turn out even riskier than expected, have been assigned a whopping 150% risk weight.

But that explanation was never challenged. The fact that AAA to AA rated assets could be leveraged 62.5 times by the banks, when compared to the 12.5 times allowed leverage with unsecured loans to unrated entrepreneurs, created the incentive structure for the 2008 crisis, caused by the excessive exposures to the AAA rated securities backed with mortgages to the subprime sector in the US, which turned out very risky; or by the excessive exposures to assets covered by default guarantee sold by AAA rated AIG.

Even after that crisis, the silence on it has persisted. As is our bank systems are doomed to especially large crisis, caused by especially large exposures to assets perceived ex ante as especially safe, but against which when these turn out ex post to be especially risky banks hold especially little capital.

How did the weavers in Basel manage to convince the world that with their regulations the bank systems were fully dressed, and that anyone not seeing that were unfit for their positions, stupid, or incompetent? I have, like the child in Hans Christian Andersen’s “The Emperor’s New Clothes”, shouted out innumerable times that our bank systems are now even worse of than if naked, but this has obviously not sufficed.

Harford opines “good policymaking is now a team effort. It requires different perspectives and a range of specialist expertise. We all must learn to work with people who see the world very differently”

Indeed, and there is of course more than enough “technical skill and the political clout to challenge” these regulations, but yet nothing happens. Could there perhaps be too many disincentives to do so? For instance like then not being invited to Davos? 

Sir, one day historians will scratch their heads trying to figure out the reasons for the world’s now more that thirty years silence, on the outright loony (and statist) risk weighted bank capital requirements. Do you not wonder what they in that respect could say about FT’s?

@PerKurowski

If Remainers want Britain back in EU why do they not make the proposals that would make EU more attractive to other Europeans?

Sir, Tim Harford, with respect to the Brexit referendum writes: “It was always clear that asking an absurdly simple question about an absurdly complicated decision was unlikely to work out well.” “Picking a bread-maker is like choosing a Brexit”, May 19

Really? Was the real problem not more that the “experts” expected a simple answer that agreed with their take on an “absurdly complicated decision”? Sort of like what helped Trump to be elected. 

If Britain has problems with getting out of EU, it would seem that many EU nations have even more ingrained problems with staying in EU… having to live under the ever-growing reaches of an evermore distant European Commission.

This week the European Commission tweeted: “Today, municipalities will be able to apply for €15,000 EU financing to install free wireless internet hotspots in their public space. First-come first-served!” Would that not be a perfect opportunity for Remainers to come out in full force with a “See… that is one of the thousand of examples for why so many in Britain went for Brexit”?

With or without Brexit, Europe will remain, and Britain will be a part of it. Britain could be a leading voice proposing the reforms that would allow Britain to reenter EU. And I am sure they would find much sympathy with others equally fed up with having to live under the thumbs of besserwisser technocrats. 

The best of the Winter Olympics 2018 for me was seeing Sofia Goggia singing her Italian national anthem with such an enthusiasm. There was not one bit of Europe present in her voice… and that is an indication Europe is not going in a European direction.

PS. Just in case you are curious, the worst for me at the WO-2018 was to suffer with Egvenia Medvedeva when not winning gold.

@PerKurowski

Martin Wolf, beware; we all, including you, are not so immune to populism as we would like to think.

Sir, Martin Wolf opines on the dangers of populism and haughtily instructs us with: “those who wish to resist the rising tide of populism have to confront its simplifications and lies”… “The economic origins of the populist surge: Political turmoil in several western democracies is a legacy of the global financial crisis” June 28.

Before preaching us Wolf should know that beside easy to see through vulgar populisms, like the Chavez’ kind, there is also much more sophisticated but not less dangerous populisms, and to which the elite could also easily fall prey.

For example: The Basel Committee, and other bank regulators announced: “Banks and evil banksters are not to be trusted. They want to earn huge returns on equity by taking too many risks with your deposits, and then leave you as taxpayers to clean up their mess. But don’t you worry! We are going to fix that for you, with our risk-weighted capital requirements. More risk more bank capital - less risk less capital”.

And too many super duper experts, like (white guy :-)) Martin Wolf, fell for that nonsense.

This regulation, by creating incentives for banks to build up dangerously large exposures against very little capital to what was perceived as safe, like for instance to AAA rated securities backed with mortgages to the subprime sector, and to sovereigns like Greece, clearly failed and caused the 2007/08 crisis. But the same regulators now tell us: “Be calm, we have everything under control”, and too many keep believing them just the same.

And so now we are offered: some risk independent capital requirements, which could cause the remaining risk-weighing to be even more distortive on the margin; liquidity requirements that will equally distort; some tests of the stresses a la mode the regulators deem to be important; the creation of living wills by bankers who must surely find it hard to know what’s left to will after a severe crisis; and making sure banks do not apply too much of their own risk models but use more of the (loony) standardized Basel risk weights. In summary, all our regulators are managing to do is to assure the creation of more and more systemic risks.

And if someone like me denounces that regulators dangerously distort the allocation of credit to the real economy, those who have fallen to that regulatory populism, like Wolf, have the toupee of telling me that the evil banksters have an obligation to see through all that, and still do what is right. 

So now green is safe so you can finance it, but red is risky so you cannot. That entirely ignoring that green could just be safe houses with basements in which the young can live with their parents, while red could be the risky SMEs and entrepreneurs that if financed, could help the young to find the jobs they need in order for them to afford to buy houses.

Sir, frankly, have you ever heard of such technocratic bullshit populism?

But could I also not be the victim of populism? Surely! Which is why I wake up each day en-garde, ready to question everything, including what you opine Sir, sorry!

PS. Structural unemployment, brought on by robots and automation, is one of the greatest threats to social cohesion. That is why I wish for my world to try a universal basic income scheme, before it is too late. Once social cohesion breaks down it is so much harder to mend it… Venezuela dixit. Does this make me having fallen for some silly populism? If so, tell me so!

@PerKurowski

Let us not allow group-thinking unaccountable technocrats operating in mutual admiration clubs decide for us voters

Sir, Tim Harford explains many reasons why a normal voter cannot be duly informed about all matters. Though that weakens democracy, it is a fact of life, and so he opines: “The workaround for voter ignorance is to delegate the details to expert technocrats.” “The man in Whitehall sometimes does know best” March 18.

I agree, except that I would have to add the caveat: As long as those technocrats operate transparently and can be openly questioned by any normal voter who happens to be interested in the subject.

And I say that out of experience. I consider the risk weighted capital requirements for banks that have come out of the Basel Committee to be about the most damaging and useless regulations ever; and I have a long list of questions that I have never been able to get a response to. Like for instance:

Why did the regulators not look at all empirical evidence that exists on what has caused all major bank crises? In that case they would not have assigned a risk weight of only 20% to what is so dangerous for the banking system as what is AAA rated, and one of 150% to the totally innocuous below BB- rated.

Why did the regulators not define the purpose of the banks before regulating these? In that case they would not have ignored the distortions in the allocation of bank credit this regulation causes?

Of course journalists, like those in the Financial Times, could play a vital role going between technocrats and voters… but what when they don’t want to do that for their own particular reasons?

PS. Harford writes “Better a flawed expert than a flawed amateur” Yes, but let us keep a watchful eye on the experts; let us never forget George Orwell’s comment, in “Notes on Nationalism”, “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool” or references to Patrick Moynihan opining “There are some mistakes it takes a Ph.D. to make”.

@PerKurowski

What makes me most nervous about Brexit is seeing how so many of the expert’s elite have gotten the willies.

Sir, you can all count yourself lucky at FT for having coolheaded Lucy Kellaway as a colleague. When she indicates, “The 10 minutes we debated high heels on the radio were the sanest minutes I’ve had since the referendum” she is telling the world that there still are some reserves of “stiff upper lip” in Britain, "My advice is to carry on, whether you are calm or not", July 4.

Thank God for that. If you are to handle the Brexit process reasonably well, the last thing you need is for that to be done by those who seem to have gotten down with some serious heebie-jeebies.

@PerKurowski ©

But why do some, like Gillian Tett, insist on trusting some totally failed experts?

Sir, Gillian Tett writes on “Why we no longer trust the experts” July 2.

But one could also ask: “Why do some keep trusting totally failed expert?” or “Why are not experts questioned more?”

Those responsible for Basel I and II regulations, they allowed banks to leverage equity especially much with those assets perceived ex ante as safe, precisely those assets to which bank could create excessive exposures; and which could result very dangerous if ex post, as indeed happened, these assets turned out to be very risky, like the AAA rated securities and sovereigns like Greece.

And by imposing higher capital requirements on what was perceived as risky, like SMEs and entrepreneurs, they made it even harder than usual for these extremely important economic agents to access bank credit.

And yet, basically the same experts, using basically the same although much more complicated script, are allowed to keep on regulating with Basel III.

That would never happen in Hollywood or Bollywood after a major box-office flop.

Here is an aide memoire on the egregious mistakes of current bank regulations.

So why is it so hard for FT that so proudly announces a motto of “Without fear and without favour”, to shame the failed regulators, as they should be shamed. There is nothing o dangerous as experts not duly sanctioned. Frankly, from the looks of it, we should not trust many expert journalists either.

PS. I believe it is much more important to make sure our banks are regulated by adequate persons than picking a good restaurant… but perhaps some would disagree.

@PerKurowski ©

At least Lucy Kellaway defends with honor the “Without fear and without favor” motto of the Financial Times

Sir, Lucy Kellaway does great living up to “Without fear and without favor” when she socially sanctions all the full of themselves experts, and those who socially suck up to these. Well done! “Boneheaded aphorisms from Davo’s windy summit.” February 1.

It is a real pity there are not many more like her at FT. The world could benefit a lot if the journalists at FT dared to, for instance, question more current bank regulators on what they are up to… like for instance with their zero risk weight to sovereigns and the 100 percent risk weight for that private sector that makes the sovereign strong.

@PerKurowski ©

The more qualified experts become, like the Fed’s, the more in awe will too many be of their inscrutable mumbo jumbo.

Sir, Sebastian Mallaby writes: “By toggling short-term rates, the Fed hopes to guide the more important long-term ones that matters to homebuyers and businesses, but the transmission mechanism is unstable” “Whether they raise or hold, central bankers are due a fall” September 12.

But the transmission mechanism has been also made more unstable than usual by means of very faulty bank regulations that have been imposed on banks.

Mallaby writes: “Gone are the days when the Fed was a holding pen for cronies and chancers… modern bankers have become more scientific and sophisticated [but] there is a danger in pushing this reverence too far”

Indeed, Edward Dolnick in his “The forger’s spell” wrote about Daniel Moynihan opining “There are some mistakes it takes a Ph.D. to make” and also quoted George Orwell, from “Notes on Nationalism”, with: “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.”

And the pillar of current bank regulations, the portfolio invariant credit-risk weighted capital requirements for banks, is a truly great example of the kind of mumbo-jumbo that can be produced by experts.

John Kenneth Galbraith wrote in his “Money: Whence it came, where it went” 1975: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.” And one of the great dangers of these times of ample access to information is that the number of those pretending knowledge is increasing exponentially.

@PerKurowski