The current low interest rates on public debt are completely artificial.

Sir, again, for the umpteenth time, Martin Wolf finds it “hard to understand the obsession with limiting public debt when it is quite as cheap as it is today” “Negative rates are a symptom of our ills” April 13.

But again he refuses to delve into why public debt is “as cheap as it is today”. Where would interest rates on public debt be without central banks buying public debt; or without regulators allowing banks to hold much less capital against the debt of the monarch, than against all other debts?

Wolf also brings up a frequent ritornello of his, namely that “The world economy is suffering from a glut of savings relative to investment opportunities.” But he does not ask himself where that saving glut could be had it not been for QEs.

Wolf informs us that higher interest rates, “would force borrowers into bankruptcy”. Yes but is that not a natural and necessary element of how savings glut are reduced? In a letter titled “Long-term benefits of a hard landing” that FT published in 2006, I wrote: “the hard truth… gradualism could create the most accumulated pain… [do not] ignore the value of pruning or even, when urgently needed, of a timely amputation.”

Wolf’s standard suggestion for how to eliminate the savings glut is having government investing in infrastructure. Nothing’s wrong with that, good infrastructure is always useful, though any waste building it, is just that, waste.

But building bridges does not mean these will be used. And how are we to make sure we get the new investments that will use the infrastructure built, with risk weighted capital requirements that make banks stay away from what perceived as risky? What we now have is a banking system fully dedicated to solely financing what is perceived, decreed or concocted as safe.

For a government to take on public debt should be a delicate matter, knowing that it is our children and grandchildren who will have to service that debt. To do so based on some artificial current low rates is not something I can support.

PS. With a $2 per gallon gas tax the US could pay each American citizen about $900 per year. Good for the fight against climate change and inequality, and fairly decent for the economy. That would be a good start for a Universal Basic Income scheme, which I much prefer over Helicopter money, first because it is duly funded, and second since I do not fully trust the helicopter pilots  J     

@PerKurowski ©

Martin Wolf, much more than helicopter droppings, we need regulators who understand what banks are for

Sir, I refer to Martin Wolf’s “The helicopter drops might not be far away”, February 24.

As you well know I suffer a self-confessed obsession with denouncing the distortion that the credit risk weighted capital requirements for banks produce in the allocation of credit to the real economy. Martin Wolf, though he does not confess it, suffers a similar obsession, with ignoring that distortion.

Here Wolf refers again to “the major governments are able to borrow at zero or even negative real interest rates, long term”. And Wolf refuses to notice that sovereigns, with the low capital requirements they generate for the banks, have been declared by regulators to be preferential bank borrowers. And that is especially important when bank equity is scarce.

If you force the banks to hold the same capital against sovereigns than what they are required to hold against loans to SMEs and entrepreneurs, then you would know what the non-subsidized borrowing rates of governments really are.

Or if you allow the banks to hold the same capital against loans to SMEs and entrepreneurs than what they are required to hold against sovereigns and other preferential borrowers, then you would see investments increase. And that without increasing significantly the risk of banks, since loans to “risky” SMEs and entrepreneurs never cause major crises.

Wolf refers to the “lunatic…austerity obsession”. No! What’s really lunatic is the regulators’ risk weighing obsession… as if they were Gods.

Wolf should ask the following, for instance to Adair Turner whom he references:

How many bank loans to SMEs and entrepreneurs have not been awarded in America and Europe during the last decade only because of the risk weighted capital requirements for banks, ten thousands, hundred thousands, millions?

And so of course we might need helicopter money, that at least would be much better than QEs’ money redirectioned by bank regulators; but more, much more than that, we urgently need bank regulators who understand the concept of: “A ship in harbor is safe, but that is not what ships are for.” (John Augustus Shedd, 1850-1926)

PS. And that would also be the best way to dent inequality: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.” J.K. Galbraith’s “Money: Whence it came where it went” 1975

@PerKurowski ©

Europe, without cleaning up your bank regulations, all what ECB, Brussels and governments do, is useless and dangerous.

Sir, we have bank regulators allowing banks to hold much less equity when lending to a sovereign, than when lending to a small businesses or an entrepreneur; and we have ECB planning to buy up more sovereign debt.

That evidences a public policy based on the assumption that government bureaucrats know better how to invest in an effective way for the economy, and for the society, other people’s money, than what small businesses and entrepreneurs can do when pursuing their own dreams. That is truly a shaky ground on which to salvage the future, of for instance Europe.

And all that nonsense derives from that utterly absurd belief that governments, sovereigns, are less risky, because they have the capacity to tax its own people or to print money.

Sir, whether you stimulate the economy in Europe with ECB’s planned QEs, helicopter drops of money on citizens, or fiscal deficits, does not really matter, neither will work; as long as you have regulations that hinder credit from going freely to where it is most wanted and needed.

And therefore it is so hard for me to understand how Wolfgang Münchau (and You, and most other) can suggest, or evaluate programs, without referring to the need to correct this fundamental flaw, “An imperfect compromise for the Eurozone” January 26.

PS. Münchau writes “Germany’s retirement system — where pensions are not invested in the stock market, but in low-yielding government bonds — is not equipped for an environment in which interest rates are at zero for long periods”. Does he think that system to be better prepared if ECB is too successful fighting deflation?

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.

Lord Turner, if a helicopter is to drop money, then drop it on the citizens, who are those who will have to pay for it.

Sir, not only does Bank of England buy huge amounts of government bonds; and banks do not need to hold any equity against these bonds, so they are also big buyers; and new bank liquidity requirements will also favor them holding sovereign instruments.

But now Lord Turner, to top it up, also wants to make a Friedman helicopter drop of money, on the government, on its bureaucrats, to finance a special one shot deficit, “Print money to fund the deficit – that is the fastest way to raise rates” November 11. He really must adore government!

By the way this is not the first time Lord Turner speaks about this drop.

I have no problem with the concept of a helicopter drop (I have a gold hedge) but, if something goes terribly wrong, and run inflation results, it will be the poor who suffer the most. And so I would suggest dropping that money directly on the British citizens.

Lord Turner explains the “current mess” in terms of “excessive private sector credit growth”. Indeed, but let us not forget that, as a bank regulators, by allowing the outright stupid credit-risk-weighted capital/equity requirements for banks, was himself much guilty of that. 

That regulation caused banks to leverage their equity to the skies; completely distorted the allocation of bank credit in the real economy, and, by favoring “the infallible” and discriminating against “the risky” is also a driver of growing inequality. 

And we are to trust them?

PS. If we know that inflation is primarily a tax on the poor, then why is deflation so bad for the poor?