At what point do negative rates on government debt become absolutely incompatible with its zero % risk weight?

Sir, in reference to Dan McCrum’s “Fire up the printing presses for a useful jolt to the economy” August 5, this is what I have to say.

Government issues bonds, the public buy these, and central banks, wanting the economy to grow, then buy these from the public.

Then the public does not know what to do with that purchasing power given to them by the central banks and, wanting to play it “safe”, looks to buy government bonds, and so the interest rates on public debts goes further down.

And so then Martin Wolf and other recommend the government to take advantage of these low rates, in order to invest in infrastructure. And if government follows their advice, it will issue more bonds, and the public will buy these.

But since the economic punch from infrastructure investments vanishes quite fast if there are no one willing to use and pay the right price for it, the central banks will then buy more government bonds from the public… and on and on it goes.

And, to top it up, banks and insurance companies are told by their regulators: “If you do not buy 0% risk-weighted government bonds, then you have to cough up with more equity”. And so banks (and insurance companies and alike) buy more government bonds, and the rates on these keep falling and falling… where does it end?

At what point do negative rates become absolutely incompatible with a 0% risk weight? How much capital will banks then need to hold against government bonds? How do we get off this not at all merry merry-go-round?

And to top it up, meanwhile, if SMEs or entrepreneurs, those who could perhaps best help to get the real economy going, want the opportunity to a bank credit, banks are told that “since these clients are risky you need to hold more capital against their borrowings”. And so banks do not lend these clients the money, or, in order to compensate for the higher equity requirements, charge higher interest rates, making the “risky” riskier.

How the hell did we land in this hole? I know!

PS. With respect to their future pensions, are central bankers and regulators isolated from their decisions? Should they be?

@PerKurowski ©

Hollywood would never allow a Basel III to be produced by those responsible for a Basel II flop

Sir Hans-Joachim Voth and Mauricio Drelichman refer to the worth of risk-sharing between investors and the governments who borrow, as well as the need for thick equity cushions to help banks absorb the losses and withstand the problems derived from government defaults, “Banks should learn from Habsburg Spain” August 1, 2013

Put that in the perspective of Basel II bank regulations which required a bank to hold 8 percent capital (equity) when lending to a “risky” citizen, but allowed banks to hold no capital at all, ZERO, when lending to one of the “infallible sovereigns”.

Total disaster had to be the result of such undue favoritism of the sovereigns and it should be obvious now that it was plain crazy to allow a bunch of silly bank regulators to regulate for the whole world in splendid and incestuous isolation.

But the looniest bit seems still to come… since we have mostly allowed the same regulators responsible for the Basel II flop, to produce Basel III using basically the same script, directors and actors. Neither Hollywood nor Bollywood would ever have done such a stupid thing.

Tax heavens are always the best antidote to tax havens… and governments should earn our taxes

Sir, I commend you for in “Taxing wealth”, August 30, daring to recognize “there is a case for shifting burden from activity to asset”. And I would agree! 

I assume though that you suppose those taxes on wealth would act as a more transparent tax substituting for how financial repression, with its negative real returns on government debt, seems currently intend to tax wealth. True? Because, if you are thinking in terms of an additional tax, then I guess, many would start searching urgently for a tax-haven.

And, of course, governments should earn our taxes!