The coronavirus will unleash a horrific Minsky moment in our bubbled-up debt overextended economies

Sir, I refer to Martin Wolf’s “The virus is an economic emergency too” March 18. 

Indeed, more than a week ago I tweeted: “The world is prepared somewhat for the expected, but not enough for the unexpected. That’s why, worldwide, coronavirus will cause larger number of deaths because of its economic consequences, than because of its health implications”.

And for years I have also tweeted, “The current fake-boom, put on steroids by huge central bank liquidity injections, low interest rates, and Basel Committee’s pro-cyclical risk weighted bank capital requirements, will end in a horrific Minsky moment bust, equally put on steroids.”

Sir, bank capital requirements used to be a percentage of all assets, something which to some extent covered both EXPECTED and UNEXPECTED risks. But currently Basel Committee’s risk weighted bank capital requirements, those that operate over the silly low 3% leverage ratio, are solely BASED ON EXPECTED credit risks. So even if Wolf can write “The pandemic was not unexpected”, for banks and its regulators it sure was completely, 100%, unexpected. And all the banks will now soon stand there completely naked.

And what help can banks be expected to give entrepreneurs and SMEs when they are required to hold much more capital when lending to these, than when holding “safe” sovereign debts and residential mortgages? Will banks be able to raise the needed 8% in capital or will regulators lower that requirement?

Wolf writes, again, “Long-term government debt is so cheap”. Sir, when will Wolf dare think about what those rates would be, for instance in Italy, if its banks needed to hold the same amount of capital against loans to their government than against loans to their Italian entrepreneurs?

“Governments can just send everybody a cheque”. Yes, a perfect moment to build up an unconditional universal basic income scheme; but it needs to be well funded, not with public debts expected to be repaid by our grandchildren. Possible sources are high carbon taxes, something which would align the incentives in the fights against climate change and inequality; another possibility is to tax those advertising revenues generated by exploiting our personal data.

PS. As to USA it should immediately eliminate of all health sector discrimination in price, access or quality, between the insured and the uninsured.

PS. As to education all professors and administrative personal should have their salaries reduced, something which should be compensated by participating somewhat in their students’ future income streams.

http://subprimeregulations.blogspot.com/2020/03/the-basel-committee-for-banking.html

@PerKurowski

On Main Street what’s perceived ultra risky, is de facto much less dangerous than what’s perceived ultra safe.

Sir, Simon Kuper writes: “The Republican plan to strip health insurance from 22m Americans (including 18m adults), it would kill about 32,700 adults annually (using the mid-range estimate). That’s gruesome. But boring old obesity kills far more.”, “How to solve the obesity epidemic” July 29.

That presents a perfect opportunity to explain again, for the umpteenth time, what regulators did wrong with their risk weighted capital requirements for banks.

They would have assigned a higher risk weight to the Republican plan, because even though it might kill less it is perceived (or decreed) as riskier, than what they would assign to what though more dangerous for society, obesity, is perceived as safer.

In Basel II, the ultra dangerous ultra safe AAA rated got a 20% risk weight, while the totally innocuous ultra risky below BB- rated got a 150% risk weight. 

PS. Cars and motorcycles.

@PerKurowski

Health Transformation Alliance should do America a favor and also represent all those not insured.

Sir, Rana Foroohar writes: “America has a healthcare market that … has almost no price transparency… is controlled by vested interests (doctors, pharmaceutical and insurance companies) who exert monopoly power against the businesses and consumers they are supposed to service, and is highly fragmented and inefficient.” That results in “that healthcare in the US is the most expensive in the world by about 5 percentage points of gross domestic product” “Employers can help fix American health” March 20.

Foroohar quotes James C Capretta with: “The system would work a lot better if all of us could put pressure on doctors and insurance companies to provide more transparency.”

Absolutely. But I have argued that legislators could also provide much help by simply decreeing that, even though health sector suppliers are to be totally free to fix the prices for their services and products, they should not be allowed to use prices that discriminate excessively.

About a decade go I remember thinking: “If when needing medical services I could be sure being charged the same as my insurance company is, I could almost do without an insurance. What I really cannot do is to expose myself to being billed as an unprotected uninsured Per Kurowski.”

So it could be of great help the Health Transformation Alliance to which Foroohar refers, would, to their 4m employees, manage to add the representation of all the uninsured. That could signify much more for the American health sector than any of all other health and insurance plans being discussed in Congress.

Sir, in the health sector insurance companies is like the insured’s lawyers. But just like those who cannot afford lawyers are given legal assistance, the uninsured also need someone to defend them. 

PS. Here is what I wrote on this to FT back in 2009, when Obama-care was being discussed.

PS. And here what I wrote in 2007

PS. Sir, think of it, if Health Transformation Alliance negotiate only on behalf of its 4 million employees then those that are outside of it all, will find prices even higher.

@PerKurowski

ABACUS 2007-AC1: The whole truth and nothing but the truth!

Sir I refer to the extensive report by Patrick Jenkins and Francesco Guerrera, “Goldsman versus the regulator” April 19. Yes Goldman Sachs might have behaved unethically and even illegally but the whole truth and nothing but the truth would in this case have to include the following facts, no matter how politically or agenda inconvenient they might be.

IKB the German bank bought the two tranches of ABACUS 2007-AC1 almost exclusively because of the following two reasons:

First both tranches, the A1 paying Libor plus 85 basis points, and the A-2 paying Libor plus 110 basis, points were rated Aaa by Moody’s and AAA by S&P when purchased by IKB.

Second, in order to invest $150 million in these securities, which because of their ratings were risk-weighted by Basel II at only 20%, IKB needed only to have $2.4 million of capital, 1.6%, when compared to the $12 million it would be required to have if lending that amount to unrated small and medium sized German companies.

If IKB had known that Paulson had had his hand in the picking and known fully about his motives then they might have asked for a slightly higher interest rate, perhaps 10 basis points, and still bought the securities.

If the securities did not have the splendid credit ratings assigned to them by the credit rating agencies then they would probably not have bought them even if Mother Teresa had done the picking.

If the regulators had placed the same type of capital requirements on all assets then IKB would have stayed home, probably lending to their traditional clients, instead of going to California to dig prime rated subprime gold.

And so while naturally we should lend all our support to efforts to eliminate wrong-doings like those described in the action by the SEC against Goldman Sachs that should not signify we take our eyes of the unfortunate truth of the world having been saddled with grossly inept regulators who created grossly bad regulations.

PS. The truth was even worse. Years later I found out the EU authorities, in a gesture of misunderstood solidarity had assigned Greece a 0% risk weight, which meant European banks could lend to Greece against no capital at all.

But might the US have become sicker now?

Sir the more divided a nation is, the sicker. I as a Venezuelan should know. That is why I cannot join you in such unchecked felicitation for the US having passed their health bill, “Obama secures his place in history” March 23.

Since the only thing that a nation can truly unite around is something which can easily be understood, a more than 900 pages long bill unfortunately evidences that those involved did not care sufficiently about the health of the nation. That, for us foreigners who are convinced that so much of our descendants’ wellbeing is much dependent on the health of the US, does not make this truly a day to celebrate… and this even if we agree with the reform.

But there are some glimmers for hope though. Having lived in the US for more than seven years now, the only aspect related to health sector reform on which I felt there was almost total consensus about was tort-reform. That according to the bill is now to be studied by individual states, receiving quite modest grants of up to $500.000, with the idea of providing Congress a report on the issue in December 2016 and so, hopefully, then some source of unity could be provided for, but, why the wait?

The reformers of the health sector need to go to Basel.

Sir in reference to “Debating US health reform”, August 12, I hold that instead of town hall meetings the reformers should go and visit the Basel Committee. There they could learn about empowering health rating agencies to check up on the citizens and thereafter place some special capital requirements on the insurances of the unhealthy; by which they can provide a very fiscally sustainable and Darwinian solution to the whole problem.