What do we all have left to counter any major new round of debt-failures with?

Sir, Jonathan Wheatley reports that according to the Institute of International Finance “Total debt owed by households, governments, and financial and non-financial corporations were $247.2 tn at the end of March 2018 and, relative to gross domestic product, exceeded 318 per cent” “EM exposure Surging debt puts pressure on global financial system” July 12.

Emerging markets? What about all of us?

Households count on their income and worth of assets, basically houses, to pay back their debt… and their increased debt, anticipated demand, means they cannot help each other as much as they used to.

Non-financial corporates, which have become much more leveraged, count on business remaining healthy, though indebted households and governments will find it harder to keep up the demand they need.

Governments depend mostly on tax revenues, and these will depend on how it goes for households and non-financial corporations.

Financial corporates depend on deriving some profitability intermediating for the other three sectors, and on In God We Trust 

Looking at the harrowing figures three questions come to my mind.

The first, where would we all be if we in 2007-2008 had gone for the hard landing I suggested in 2006, instead of pushing the crisis can forward?

The second, where would our banks and all our debts be if banks had needed to hold for instance 10% in capital against all assets?

The third, WTF do we all have left to counter any major new round of debt-failures with?

@PerKurowski

Martin Wolf, I totally agree it is not nice where we find ourselves, but you’re part of how we got here… I am not!

Sir, Martin Wolf writes: “Who would have imagined that primitive mercantilism would seize the policymaking machinery of the world’s most powerful market economy and issuer of the world’s principal reserve currency? The frightening fact is that the people who seem closest to Mr Trump believe things that are almost entirely false… Protection just helps some businesses at the expense of others… The rhetoric of “America First” reads like a declaration of economic warfare.”"Trump and Xi battle over globalization" January 25.

Indeed but then again: “Who would have imagined that primitive statist technocrats would seize the regulatory machinery of banks of the world? And the frightening fact is that the people who seem close to the Basel Committee, like Martin Wolf, also believe things that are entirely false, like that what is perceived as very risky is very risky to our banking system… which only helps to protect the access to bank credit of “the safe”, at the expense of “the risky”…The rhetoric of “We Regulators must make our banks safe” reads like a declaration of economic warfare.”

Sir, I am sure that had the world not silently accepted the risk weighted capital requirements for banks in 1988, which introduced such obnoxious statist concepts of assigning a risk weight of 0% to the Sovereign and 100% to We the People; and then in 2004 going on to assign a such a meager risk weight of 20% to what was AAA rated… the subprime crisis would not have happened… Greece would not have received so much in loans, and Trump would still busy himself with hotels and casinos.

Martin Wolf, I understand you are also a victim of that confirmation bias that have swept the regulatory circle, but your silence on the distortion in the allocation of bank credit to the real economy, makes you, ever so little, an accomplice of Trump’s rise to the presidency of America… so don’t just wash your hands like any Pilate.

PS. “rules-based trade” is not really “open markets”

PS. I did what I could.

@PerKurowski

FT, you have good reporters; send them to the Whitehouse to pose Trump some constructive questions on protectionism.

Sir, you write: “Forcing industrial output to return to the US is likely to create work for US-based robots rather than workers” “Take the US president’s protectionism seriously” January 25.

Precisely, that is what I have tweeted for some time now, and on which I have written some letters that you have steadfastly decided to ignore, like those on the subprime banking regulations, without thinking of it as any type of censoring, or without “without favour”.

But, without resorting to qualifying Trump’s protectionism as “profoundly retrograde” which means so little, which sounds so besserwisser, and which can only insult those who are then implied of having voted for a “retrograde”, why don’t you use your voice to send a journalist to Washington to ask of the Whitehouse, directly, some constructive questions?

For instance: “With current and future actions taken against foreign suppliers, in order to make America great again, what ratio of new employments of humans to robots do you foresee? How many robots have substituted for humans in jobs in USA during 2106?

And, if there’s a chance and a will, dare ask: Why does the Whitehouse think that trade protectionism is worse than that financial protectionism that is imbedded in the current risk weighted capital requirements for banks?

@PerKurowski

Financial protectionism could be just as bad or even worse than trade protectionism

Sir, I refer to the so plentiful anti-trade-protectionism writings, in FT and everywhere, and which all warn about the dangers of what Big Bad Donald Trump is up to. Many of these, not all, are solidly argued. Yet these contrast so much with the almost absolute silence against the financial protectionism that is imbedded in current bank regulations.

The risk weighted capital requirements for banks allow banks to leverage more with assets perceived, decreed or concocted as safe, than with assets perceived as risky. That means banks will earn higher risk adjusted returns on equity on the “safe” than on the “risky; so banks will favor with credit or investments what’s safe over what’s risky.

Is this not how it always is. Yes but before the introduction of these capital requirements the perceived risk was cleared for by the size of the exposure and the risk premiums charged. Now when capital requirements are also based on the same perceived risks, the effect of these in the allocation of bank credit to the real economy are augmented and so distort.

Here are some risk-weights of Basel II. Sovereign=0%, AAArisktocracy=20%, residential housing=35%, not rated “We the People”, like SMEs=100%, below BB-rated=150%.

Those who do not see how those with lower risk weights have their access to bank credit protected, against that of the risky, are not interested, dumb or trapped, almost irreversibly, by the mother of all confirmation biases.

@PerKurowski

Those who cannot handle a test failing never test

Sir Tim Harford correctly proposes that “Political ideas need proper testing” March 18. What he fails to understand though is that the main reason for the politicians not wanting to perform tests on their proposals is that if they fail they would not know what else to propose and that is as we know a nightmare for these professional besserwissers.

Take as an example financial regulations. The regulators came up with what they thought was the splendid idea of rewarding banks with lower capital requirements if they kept themselves doing more operations deemed as having lesser risk by some external and supposedly independent credit rating agencies. Because it naturally led to the dangerous overcrowding of traditional safe-havens, like mortgages, the results were absolutely disastrous. But the same faulty regulatory paradigm is still applied, only because the expert regulators kept in their places have no clue about what else to do, and that they cannot allow us to see.

There is regulatory financial protectionism of what is seemed as having a lower risk

Sir John Plender writes “Protectionism is coming at us from all directions” July 1 but fails to mention that financial protectionism that has been around for just a couple of years and that discriminates among lenders. On top of what the market charges for risks an unrated borrower has to pay for the cost of the bank having to put up 8 percent in capital while a triple A rated company gets away with the cost of only 1.6 percent. And then we ask why do inequalities grow?

Has this financial protectionism served us well? Absolutely not! I have even read Nobel-prize winning economist who though standing in front the monumental losses derived from financing the safest assets, houses, in the supposedly safest country, the US, and in instruments that carried the best credit ratings, still describe our current crisis as having originated by excessive risk taking. Ridiculous, they are either intellectually lazy or they have no idea of what they are talking about. It should be crystal clear that this crisis resulted from of an excessively misguided risk-adverseness and which got a tremendous boost from the regulators protecting what should not be protected.

Free the banks from the chaperones and get the party going!

Sir Charles Goodhart´s and Avinash Persaud´s “A party popper’s guide to financial stability” June 5 reads like the desperation of a garage fixer to fix something with whatever epoxy he can lay his hand on.

I have myself often proposed a progressive tax on banks, based on the-bigger-you-are-the-more-it-will-hurt-if-you-fall-on-me principle but, what on earth do they mean by taxing the growth rate of bank assets, which is what raising capital requirements mean? That slow growing banks can just sit back and trade growth allotments, like if bank assets were carbon type contaminants?

No instead of worrying so much about the possible hangovers why do they not worry more about making the party better. The current risk adverseness implied in the minimum capital requirements based on risk and as measured by the credit rating agencies, have the markets playing boring and unproductive minuets, like consumer finance dressed up as “risk free” securitizations.

The world is clamouring for decent jobs, and if the banks are to help us create them, they need to be given more freedom and responsibility. In that sense, set the capital requirements for banks at a fixed percentage of assets and get the chaperones out of their hair, so that we can get more of that risky salsa that when if times comes for a hangover, makes it at least more bearable... since the party was great!

FT Sustainable Banking Awards

The Financial Times and IFC have teamed up to create the following competition.

"The Emerging Markets Sustainable Bank of the Year Award recognizes the emerging markets bank that has shown excellence in creating environmental, social and financial value across its operations."

Sounds great but, if creating environmental, social and financial value across its operation is as I gather the promoters believe a worthwhile goal, then why do they not ask the regulators to send clearer signals about it to the banks in the emerging nations.

From what we can observe the regulators are currently signalling minimum capital requirements based exclusively on the reduction of risks as perceived by those outsourced risk surveyors we know as the credit rating agencies.

But if you want to give incentives so as to obtain the results the promoters seem to wish, then you might be better of sending clearer signals than those of a competition. For instance why do you not set up minimum capital requirements based on the rating of environmental, social and financial value creation? And, if you do, why not throw in something about job creation too, which also seems something quite worthwhile for the banks to do.

That is if course unless all what is meant when referring to sustainable is solely the sustainability of the banks themselves.

Let us first get rid of the financial commissars

Sir Chris Giles in “Credit squeeze leaves a long shadow” October 17, says that “credit rating are in the spotlight for providing the same rating to complex structured products and simple corporation debt with very different structures assumptions and liquidity”. If this is what we believe the problem to be, just an error in calculations and that new and better technique could take care of, then we have not learned anything and we will just set ourselves up for even a worse financial Katrina than the current. The real fundamental problem starts with the appointment of the credit rating agencies as the financial commissars that the market must heed. We all know that just cannot end well.

If only we could share into the loser’s bless

Sir, John Kay while explaining interestingly why frequently sensible investors willingly exchange very tangible money for unknown financial intangibles, “Why the winner’s curse could hit complex finance”, January 23, he might have underestimated the role of the advisor and the intermediary, whose normal incentive structure is based on deals completed and not deals avoided. As a financial advisor I have many times wished for that I could receive even a millionth part of the losses I have helped my clients to avoid, so as to be able to share the loser’s bless.