Capital requirements for banks that favor the financing of the safer present like houses and sovereigns, over the riskier future like entrepreneurs doom the world to secular stagnation.

Sir, Martin Wolf writes: “the financial mechanisms used to manage secular stagnation exacerbate it. We need more policy instruments. The obvious one is fiscal policy. If private demand is structurally weak, the government needs to fill the gap. Fortunately, low interest rates make deficits more sustainable.” “Monetary policy has run its course” March 13.

No! Secular stagnation is guaranteed by capital requirements for banks that favor the financing of the safer present like houses and sovereigns, over the riskier future like entrepreneurs. The subsidies implicit in having assigned a 0% risk weight to public debt translate into artificial low market rates. Weigh the sovereigns equal to citizens, at 100% and you will immediately see those rates shoot up.

Of course kicking the can further down with more fiscal spending based on more public debt will give our economies a breather, but for what purpose? Had central bankers and regulators accepted in that loony 62.5 times allowed bank leverages for anything rated as AAA, and insane 0% risk weight assigned to Greece that caused the crises; and gotten rid of their risk weighting based on ex ante perceptions and not on ex post possibilities, our economies would be in a much better shape. But no, their huge liquidity injections seem to have mostly been put in place in order to cover up for their mistakes. And statist journalists backed them up by solely blaming banks, credit rating agencies and markets. 

Déjà vu😡 https://teawithft.blogspot.com/search/label/secular%20stagnation

@PerKurowski

Regulators divided private sector in two, Safe and Risky. And guess who is losing out more than usual? All of us!

Sir, Bill Gross asks: “Why would the private sector… not borrow at practically no cost to invest in a centuries’ old capitalistic model proven to reward risk-taking in the real economy?”, “Central bankers are threatening the engine of the economy”, August 18.

 

In his comments Gross forgets there are now two private sectors. One, perceived, decreed or concocted as “safe”, AAArisktocracy and residential housing, and to whom banks can lend against very little capital; and the one which includes those perceived as risky, SMEs and entrepreneurs, those that regulators require the banks to hold much more capital when lending to.

And so “The Safe”, by allowing banks to leverage more their equity, provides the banks with higher expected risk adjusted return than what “The Risky” can do,

And so regulators decreed that money paid in net risk adjusted margins by “The Safe”, is worth more to banks than that same money when paid by “The Risky.

And so The Risky have been left out in the cold, that is unless they accept to compensate banks for this regulatory discrimination; by paying rates over what their ordinary risk adjustments would justify.

QEs and other fiscal stimuli, or negative interests, finds it hard to overcome this hurdle and reach with bank credit the vital SMEs and entrepreneurs, who might want to borrow, and so most of it gets wasted.

And besides The Risky, we all lose out! It refuses the risk-taking tomorrow’s economy requires be taken by todays’; and all for nothing, because The Risky never cause that type of excessive bank exposures that can cause a major crisis; that dishonor belongs entirely to “The Safe”. 

@PerKurowski ©

Are you shocked seeing the Financial Times report on banks not doing anything but storing cash, and want to help?

Sir, I refer to your front-page “Big bills: Plans to hoard banknotes pose tricky problem over storage”; and Claire Jones’ and James Shotter’s “Note of caution as Europe’s banks seek to stockpile cash” August 17.

It is shocking; we all know that is not how it should be. That is money not earning what it needs to accumulate in order to pay pensions for the older of tomorrow. That is money not invested in creating the jobs of tomorrow for the young.

Just like John A Shedd said: “A ship in harbor is safe, but that is not what ships are for.”, “Money held by banks in their safes is safe (sort of) but that is not what banks are for”

Do you want to help change that? Then please support the discussion of the following:

Until banks have 8 percent in capital against absolutely all assets, including cash and including loans to infallible sovereigns, the banks should not be allowed to repurchase their own shares, or to pay out more than 20% of their net after tax profits in dividends.

With that I guarantee you some real action in banks lending to the real economy; and that could lead to real economic recovery, real possibilities to build up pension funds, and real jobs for our children and grandchildren.

Forget about QEs, fiscal stimulus and negative interest rates; and let “risky” SMEs and entrepreneurs get the credits to have a go at it.

@PerKurowski ©

There’s a distortion of the allocation of bank credit to the economy that does not want to be named, but must be named.

Sir, Mohamed El-Erian writes: “BoE had already gone beyond consensus expectations… by skillfully combining four elements — an interest-rate cut, a reinvigorated and broadened asset purchase program (QE), a special funding scheme for banks, and effective communication” ,“Bank of England bond-buying needs a fiscal helping hand” August 16.

How sad BoE is not skillful enough to understand that a regulatory distortion of the allocation of bank credit to the real economy is blocking the chances to achieve stronger and more sustainable economic growth.

What distortion do I refer to? The risk weighted capital requirements for banks of course. That which allows banks to leverage equity more with assets perceived as safe than with assets perceived as risky; and thereby that which results in banks earning higher expected risk-adjusted returns on equity on assets perceived as safe, than on assets perceived as risky.

As a result too much of BoE’s, and other central banks, and fiscal stimulus, gets to be wasted; by mostly flowing to increase the value of existing assets (stagflation profiteering) and by that way hindering the opportunities of “risky” SMEs and entrepreneurs to gain access to bank credit.

What would happen to UK government borrowings if the sovereign UK, now assigned a zero percent risk weight, had to carry the same risk weight as We the People, 100 percent? To top it up there are many other statist pro-government funding subsidies.

Sir, we have to find a smart way to urgently work our banks out of these regulations, something made difficult by the fact our current bank regulators simply do not know what they are doing. Ask them and you’ll see.

Finally, for someone from a country suffering murdering inflation, Venezuela, it is a real shocker having to read highlighted in FT: “Owning a printing press, the BoE faces no funding constraint”

@PerKurowski ©

Sir FT, Your “Do whatever you can, as long as you do not allow banks to take risks” is hard to understand and forgive.

Sir, I refer to your “Life below zero must not become the new normal: Negative rates are a cry for even more aggressive action, not less” February 7.

You write: “Punishing savers for hoarding cash encourages them to put their money to work” but “negative rates are a sign that authorities are failing in any attempt to stimulate the economy.”

And then you conclude in that “there are better ways. Central banks should be given more expansionary targets, such as ambitious goals for inflation or nominal growth. Monetary and fiscal authorities can combine, either by financing deficits with money or through straightforward unsterilized transfers of cash to the public.”

Now the absolute best way an ordinary saver can put his money to work is by having the banks allocate credit efficiently to the real and “risky” economy. Banks are though currently impeded to do so, because of the credit-risk-weighted equity requirements that, in these times of scarce bank equity, force them to keep to the officially deemed “safe” economy.

Sir your reluctance to advance that line of explanation is mindboggling. My blog www.TeawithFT.blogspot.com exists as a historic record of your behavior, a major financial newspaper, in times of crisis, and not of mine. I’m too small fry for that.

Europe, get rid of risk-weights, impose a 10% leverage ratio, and have ECB's helicopter drop equity on your banks

Sir, Wolfgang Münchau, as a tool to avert deflation in Europe, mentions the possibilities of a sizable QE helicopter drop in Europe, like €10.000 per citizen; and, sort of shamelessly using the tragic recent Paris as an excuse, argues for more fiscal stimulus, “Eurozone needs to act before deflation takes hold” January 12.

And I have to wonder, again, what goes on in his and other columnist minds, when they make suggestions like these, while at the same time they do not seem bothered by that Europe’s banks are ordered not to lend to those perceived as risky, like to small businesses and entrepreneurs. Because that is what de facto happens when regulators allow banks to hold less equity against exposures perceived as safe than against exposures perceived as risky.

What would I do? Perhaps order a 10 percent not risk weighted leverage ratio imposed on all European banks to substitute for all credit risk discriminating equity requirements; and then have the ECB to subscribe and pay in what new bank equity might be needed on a case by case basis, all with a firm-commitment to resell those shares to the market within a given period.

That would not only help to fight deflation, but, much more importantly, it would allow those tough risk-taking agents that the economy needs in order to grow when the going gets tough, to get going again.

The world is being driven towards deflation by a dangerous risk-aversion imposed by the regulators on banks

Sir, John Plender writes “The Eurozone is being driven towards deflation by a moralistic drive for austerity that does nothing to arrest rising debt as a percentage of GDP because the harder hit economies have shrunk” “World faces threat of a descent into intractable deflation”, January 7.

Wrong! The Eurozone, and others, is being driven towards deflation by a dangerous risk-aversion imposed by the regulators on banks; and which have these making much higher risk-adjusted returns when lending to the “safe” than when lending to the “risky”.

Since risk-taking is the prime oxygen for any true forward movement, the economic bicycle is stalling and falling; and no QEs or fiscal stimulus could in the medium and long term stop that stop from happening… but only make the awakening worse.

Sir FT, are you allergic to the idea that SMEs, entrepreneurs and start-ups lend our economies a helping hand?

Sir in “Central banks at the cross-roads” August 25, you describe the cross-roads in terms of whether central banks and governments are, with fiscal and monetary policies, to help or not to help. 

You do not include the crossroad that rids of the discrimination against “the risky” present in the risk-weighted capital requirements for banks. Doing so would allow banks to once again lend to medium and small businesses, entrepreneurs and start-ups. Are you allergic to the idea that they should have a chance to help out?

Professor Thomas Piketty: “Don't be so defeatist, it is so middle class.”

Sir, Robin Harding holds that “Inheritance should not be an alternative to hard work” January 6.

The setting is: “The lower the rate of growth, the smaller the percentage of society’s wealth created by those who are alive today, and thus, by definition, the larger the percentage that is passed on from previous generations… higher inheritances certainly exacerbate inequality.”

And that is derived from Thomas Piketty’s “eagerly awaited” “Capital in the Twenty First Century”. The book includes: “if the after tax return on capital is higher than the rate of growth in the economy, then all the heir and heiress need to do is save enough of the income from their inheritance… and their share of society’s wealth will rise”… ergo we must redistribute, and so we need “wealth taxes on a global scale”.

I do not agree with its general premise. An after tax rate of return on capital which is higher than the rate of growth in the economy, is something not really sustainable… unless other factors are in play. And, in this respect, I would just ask Mr. Piketty about what he believes would have happened to after tax returns on capital, without Tarps, QEs and all Fiscal Stimulus since 2007?

And also, what a horrendous vision it implies! That we should now only adapt to a shrinking economy, and give up all illusions about making it stronger and better, and just concern ourselves with that the last tree on our Easter Island we cut down is equitably shared? I can hear Downton Abbey’s Violet Crawley admonishing “Don't be so defeatist, it is so middle class.”

But of course I agree with Robin Harding in that developed (and developing) societies should “opt for the free-flowing meritocracy of the last century, not a return to the dynastic wealth of the one that preceded it.

But that, as I see it, has less to do with inheritance taxes and, at least currently, much more to do with bank regulations. You see the Basel regulators, with their risk-weighted capital requirements, do not want banks to take the risks which come with any “free-flowing meritocracy”, and instead to concentrate their exposures to the illusions of safeness of the “dynastic wealth”.

And by the way, anyone who thinks that the presence of after tax returns on capital higher than the rate of growth in the economy, would be sufficient to keep the value of an individual inheritance… has little knowledge about real life and about capitalism. Oh no! To waste an inheritance is very easy, but to keep the real value of an inheritance is, and should always be, hard work, no matter what the average interest rates are.

I wish more would concentrate more on the causes of inequality, than on the resulting inequalities. If not, and if we tax more all of the wealthy, all we will get is few oligarchs getting even more wealthy, not because of capitalism but because of crony capitalism.

I hope Mark Carney, one of the Financial Stability Board’s old men, listens to Martin Wolf, and gets it.

Sir, Martin Wolf is absolutely right reminding Mark Carney of what I have been reminding Martin Wolf for years, namely that “monetary policy works via the financial system [which if it] malfunctions, monetary policy will either not work or have lethal effects”, “Forward guidance for the Bank of England’s new man”, July 5.

I sincerely hope Mark Carney gets that, because as one the Financial Stability Board’s old men, he has not yet understood that capital requirements for banks based on perceived risk distorts and channels monetary policy the wrong way.

And I also hope Martin Wolf from now on remembers this caveat, when he also keeps pushing us on into unknown territories of fiscal and monetary expansion.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has told me not to send him anything more that has to do with “capital requirements for banks”… as he already knows it all, at least so he thinks.

No Mr. Martin Wolf, our banks are not terminally ill, and we don’t have to go communist

Sir, imagine being a director in an old fashioned bank board which approves all credits, one at the time. And then think about how you and your colleagues would proceed if, in a corner of the board room sat a regulator who ordered you to allocate a certain amount of capital for each credit, depending on the risk of the borrower, as perceived by a credit rating agency. It would of course be impossible for you to allocate the bank credits in such a way that maximizes economic growth. But that is in essence what happens today, and so we have a banking system that has become completely dysfunctional.

But this regulatory intrusion in the credit allocation system of the banks, and which among other allows banks to create money when lending to “The Infallible” against almost nothing of their own capital, and which de-facto penalizes the lending to “The Risky”, is still much ignored, perhaps even on purpose.

For instance when Martin Wolf asks: “Why should state-created currency be predominantly employed to back the money created by banks as a byproduct of often irresponsible lending?”; and follows up with a “the case for using the state´s power to create credit and money in support of public spending is strong”; he is arguing his point based on the premise that our banking system is irreversibly damaged. And based on that he suggests we should leap into a system where government bureaucrats substitute for private decision making, and “discussions between the ministry of finance and the independent central bank substitutes for markets, “The case for helicopter money…” February 13.

Yes Mr. Wolf “Cancer sufferers have to undergo dangerous treatments”, but these have to be the correct treatments. And the most correct treatment of our banking system is to help our banks to get rid of those obnoxious regulatory intruders (like Lord Turner) who so stupidly, and odiously, favor those already favored and discriminate those already being discriminated against by the markets.

Many years ago, I set up a blog titled the AAA-bomb, and where in jest I described how a disgruntled unemployed former Kremlin bureaucrat sat out to destroy the “enemy” by planting the idea of capital requirements based on perceived risk in the middle of its banking system.

But when Martin Wolf writes about fiat money promoting public spending in terms of morality, and ignores the fact that the banks’ boardroom intruders already allow banks to lend to the infallible sovereign without holding any capital, I get that uncomfortable sinking feeling that perhaps there is more of a conspiracy to it than what I ever thought possible.

Does this mean I am an extremist set against any government stimulus or deficit? Of course not! But I do believe we must see to that our economic resources are efficiently allocated by the banks, before we waste whatever fiscal and monetary space we might have available. 

PS. Wolf begins by quoting Mark Twain saying “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”. That is something that clearly describes the sheer stupidity of capital requirements for banks based on trusting too much ex-ante perceptions of risk to hold up ex-post.

PS. Lord Adair Turner in the “Debt, Money and Mephistopheles” lecture referenced, speaks about “pre-crisis financial folly – above all the growth of excessive leverage”. But there is not one word about his shameful role, as a regulator, in creating the crisis. Not a word about that he thought it was ok for a UK bank to hold 8 percent in capital, a leverage of 12.5 to 1 when lending to a “risky” UK small businesses or entrepreneur, while allowing banks to hold only 1.6 percent in capital, a leverage of 62.5 to 1, when lending to a sovereign like Greece or investing in a security rated AAA to AA.

There is no fiscal or monetary policy that can make up for bad and distortive bank regulations

Sir, Gillian Tett draws four quadrants by on one axis showing the private sector in a credit boom, and the public sector stimulating, and on the other axis the private sector deleveraging and the public sector also deleveraging, going for austerity, trying to rein in any inflation threats. 

And this tool makes it easy to understand that it is only in the quadrant where both the private sector and the public sector are deleveraging that the risk of a liquidity trap and deflation exists, and so, when there both “monetary policy and fiscal expansion must be stimulative, since loose money alone will not work”. And this Ms Tett does in “It’s time to embrace a new mental map of central banks” January 11.

Absolutely! But using the same methodology, and in this case including on one axis what is ex-ante perceived as absolutely safe, and what is perceived as risky, and on the other axis what ex-post turns out to be safe, and what turns out to be risky, one should also be able to understand that it is only the quadrant containing what was ex-ante perceived as absolutely safe and that ex-post turned out to be risky, that poses any major threat to the banks. 

And therefore one could conclude in that capital requirements for banks like the current ones, higher for what is perceived as risky and lower for what is perceived as absolutely safe, make no sense whatsoever and only distorts.

And so again, for the umpteenth time, let me repeat that it really doesn’t matter if you select the absolute correct fiscal and monetary policy if at the same time, by using loony and distortive bank regulations, you are going to impede these to work.

Suppose two equal deep recessions, two equal huge stimulus, but two different capital requirements for banks… same multipliers?

Sir, with respect to Wolfgang Münchau’s discussion of multipliers, “Heed the siren voices to end fixation with austerity” October15, I would like to ask him the following question: 

Suppose two countries, same deep recession, same huge stimulus but two different bank regulations. In the first capital requirements for banks when lending to The Infallible are many times smaller than when lending to The Risky. In the second the capital requirements are the same for lending to both groups. 

Does Münchau’s really expect the multipliers to be the same in both countries? 

What is this fixation on wanting to end austerity in terms of injections to the economy, and not wanting to even talk about ending the risk-taking austerity of bank regulations that nullify those injections?

If a new QE is politically mistimed I do not know, but it sure is still economically mistimed

Sir, I refer to your “Bernanke’s latest round of easing”, September 16, where you comment on Romney arguing on Bernanke bailing politically out Obama. 

I do not know if this latest QE is mistimed because of political reason, I do not really care about that, but what I do know, is that not only the latest but the all the former QEs, and fiscal stimulus too, have been mistimed because of economic reasons. 

Having had frequent experiences in workouts, I know you do not inject any fresh funds into any failed project, until you at least believe you have made the changes required for its success. And, as far as I know, central banks and governments, confronting the crisis begun in 2007, have been wasting away immense monetary and fiscal spaces, like if there was no tomorrow, without imposing any sort of changes in then economy. 

As an absolute minimum, central banks and governments should have eliminated those ridicule regulations that make it so hard and expensive for those perceived as “risky” to access bank credit, like the small businesses and entrepreneurs… precisely those who generates the jobs that Bernanke now says he cares so much about.