What if all finance help provided house buyers in Canada, which increases demand, reflects 30% of current house prices?

Sir, with respect to Ben McLannahan’s extensive report on the Canadian house market February 9, “Canada’s home loans crisis”, I would just want to ask:

What if regulatory and all other support developed in order to provide house buyers in Canada easier financing, something that obviously increases the demand for houses, translates into being, let us say, 30% of the current house prices in Canada?

Who has that then benefitted, buyers or vendors?

Does this mean Canada must now help with new financing to house buyers only in order to pay for old financing help?

How could something like that not end in a disaster?

As I see it much more important than helping our young to affordable houses, is helping our young to afford houses. Ce n'est pas la même chose!

http://perkurowski.blogspot.com/2018/01/many-of-our-young-will-be-without-jobs.html

@PerKurowski

Why is it so hard to understand that risks should not only be correctly perceived but also correctly considered?

Sir, Patrick Jenkins, discussing the Basel Committee’s push “to finalise another leg of post-crisis global financial reform” writes that “financial and economic stability is more important than a blinkered crackdown.”, “Basel Committee boss needs to reconsider hard line on reform” October 18.

What? “financial AND economic stability”? That’s a new one. Until now it has only been financial stability, which is why regulators (and journalists) have not cared to analyze how much current bank regulations distort the allocation of credit to the real economy. For instance Stefan Ingves, the chair of the Swedish Riksbank and of the Basel Committee, seems not to understand at all that the so much lower risk weight assigned to financing houses (35% in Basel II), when compared to the risk weight when financing SMEs (100%), has something to do with prices of houses going up and up, and the credits to SMEs going down and down.

Jenkins, on the possibility of part of the capital requirements to be based on the conduct of the banks, like misdeeds, argues: “The logic is flawed”, since “basing future capital demands on past fines duplicates the impact of a penalty”.

Indeed, but why Sir is it so hard for Jenkins, for the Basel Committee, for you and for all other in FT to understand that, basing capital requirements on ex ante perceived credit risks already cleared for by banks with interest rates and size of exposures, also “duplicates the impact” of perceived credit risks?

Is it really so hard to understand that any risk, even if perfectly perceived, causes faulty actions, if that risk is excessively considered?

@PerKurowski ©

FT: How much does the Basel Committee influence the property values in Europe?

Sir, I refer to FT Special Report on Property Europe October 18.

I wonder has anyone of the contributors to this report, or anyone else in FT for that matter, tried to figure out how much of the property values in Europe derives from the distortion produced by bank regulations?

Info: For the purpose of deciding the capital requirements of banks Basel II (and III) set a risk weight of 35% for when banks finance residential housing, and one of 100% for when banks finance the “risky” SMEs and entrepreneurs that are to help home buyers to find the jobs that will allow the house owners to pay their mortgages and the utilities.

Sure that has to mean something for the current and for the future value of properties in Europe. How much? I haven’t the faintest! Except that it’s a lot!

PS. In fact regulators make banks finance the “safe” basements where the young can live with their parents, not the new “risky” jobs they need Per Kurowski

@PerKurowski ©

Sir, would you trust a columnist who refuses to acknowledge what produced Europe’s financial crisis?

Wolfgang Münchau asks: “would you trust with your own security somebody who cannot even contain a medium-sized financial crisis? I personally would not, which is why my own preference is for the Schengen system of passport-free travel to be suspended indefinitely” “A history of errors behind Europe’s many crises” March 28.

Sir, here are some of the Basel II’s risk weights that determined how much of the basic bank capital requirement of 8 percent banks were required to hold against some different exposures:

Loans to sovereigns zero percent; to the AAArisktocracy 20 percent; financing residential housing 35 percent; and loans to ordinary unrated citizens 100 percent

That meant banks could leverage equity unlimited times when lending to sovereigns; 62.5 times to 1 when lending to the AAArisktocracy, 35.7 times when financing residential housing 35.7, and only 12.5 times to 1 when lending to the unrated citizens.

And that allowed banks to earn different risk adjusted returns on equity not based on what the market offered, but much more based on what the regulators dictated.

So forget the Euro, forget bank unions, that distortion of the allocation of bank credit to the real economy had to provoke, more sooner than later, financial crises that will destroy Europe.

And so I ask you Sir, would you trust a FT columnist that steadfastly refuses to acknowledge such facts to opine on anything? I would not!

@PerKurowski ©

Europe hangs on to blissful ignorance about Greece’s tragedy. Its prime cause was not something especially Greek.

Sir, Philip Stephens argues that Greece exiting the euro would be more costly for Europe than helping it to hold “Europe will pay the price for Greece” July 10.

You know my opinion: Europe is unwittingly already paying the price Greece is paying, by holding on to senseless bank regulations that will only guarantee the dangerous overpopulation of safe havens, and the equally dangerous under exploration of risky but more rewarding beaches.

That is what you get when, instead of capital requirements for banks based on something that could be good, like jobs or like sustainability, you just base them on banks avoiding what is ex ante perceived as risky; and this even when you should know that banks would only go where it is perceived as risky, if risk-premiums are high enough and their exposure limited.

And again I can hear you say: “Nonsense, the crisis resulted from banks taking too much risks?”

And again I ask you: Sir, I dare you to identify just one bank asset that significantly contributed to this crisis, and against which banks were not allowed, by the regulators, to hold very little capital (equity), because it was ex ante perceived as safe?

Those regulations, which so dangerously distort the allocation of bank credit, are weakening the economies. Greece’s economy has already defaulted, too much credit to the public sector and too little to the private sector, if it is not housing.

Europe, dare to hear the truth about Greece! It was not the Euro either! 

@PerKurowski

Regulators painted the banks into the dangerous corner of holding much of what is perceived as safe against little capital.

Sir, Alberto Gallo notes “The irony is that the Fed is becoming trapped by its own policies. QE and low rates have helped to solve the banking crisis, but also pushed investors to take on bigger risks” “Fed has grown complacent on credit market risk” July 1.

Yes but what has trapped them even more than so is that while providing liquidity and low rates because portfolio invariant risk weights, they forced banks into ever larger and dangerous exposures to what is, for the times being, officially perceived as “absolutely safe”.

Look for instance at the UK where even though BoE expresses concern of a housing bubble, it still permit banks to hold much less capital against mortgages than for instance against loans to SMEs.

The real problem we face today is that it is impossible for regulators to help banks out of the dangerous corners they have been painted, while they refuse to admit the possibility that it was they who did most of that painting.

Why does John Authers keep mum on how low capital requirements for banks on house financing helps to inflate the bubble?

Sir last Thursday was the 10th anniversary of the G10 approving the absolutely senseless Basel II bank regulations. And here we are and still one of your star columnists, John Authers writes about the need to prevent bubbles, in this case a bubble in the value of UK housing sector… and does not even mention the role that preferential bank capital requirements can have in inflating a bubble, “Rate rises pose biggest test for BoE bubble theory” June 28.

The risk-weight on a residential mortgage is 35%, while the risk weight for a loan to an SME or an entrepreneur is 100%. And so a bank can leverage its capital about 20 times more when financing the purchase of a house, than when giving business those loans that could create the jobs that could help home buyers to pay their mortgage and their utilities.

And I am sure John Authers must understand that this helps to inflate the house bubble, and so that we could at least expect that if BoE perceived the risk of a bubble, it would increase the risk-weight for new mortgages, before toying around with other tools… but yet Authers chooses to keep mum about all that … why?

Current economic growth is not based on risk-taking but on risk-aversion, and therefore creates more fat than muscles

Sir, I refer to your Special Report on the World Economy, October 11.

While bank regulations that make it harder for medium and small businesses, entrepreneurs and start-ups to access bank credit are not eliminated, and regulators stop insisting on that banks shall only lend to the “infallible” sovereign, the housing sector and the AAAristocracy, any economic growth will only be of the type that leads to obesity.

Why should banks earn higher risk adjusted returns on equity financing property than when financing businesses?

Sir, John Plender writes “Historically, the biggest single cause of financial crises in the UK has been the bursting of property bubbles” “BoE lacks tools needed to prick property bubble” September 25.

If that is so, which I have no reason to suspect it is not then would he, or Lord Turner, explain to us, why were regulators allowing banks to lend to property against less capital than when doing much other lending? Did that not signify that banks would be earning higher risk adjusted returns on equity on property lending than on other lending? Did that not doom banks, next time a property bubble burst, that everything would be so much worse, since banks would be standing there with especially little capital?

BoE does not lack tools. It just needs to arm itself with a new generation of regulators capable of understanding that risk-taking is not something dirty, even when banks do it. And of understanding that there is nothing as risky as excessive risk-aversion.

“A plan to finish fixing the global financial system”, or will it just finish it off?

Sir, in “A plan to finish fixing the global financial system” September 10, if his then quite an arrogant title, Mark Carney, the governor of the Bank of England and the current chairman of the Financial Stability Board writes “supervisors need to make good the pledge to G20 leaders… to tackle large differences in risk weights across banks”. I would ask him the following.

Why do you not tackle the supervisors’ own criteria of allowing large differences in risk weights to determine the effective capital requirement for banks?

Do you not understand that allowing for much much lower capital requirements on exposures to the “Infallible Sovereign”, to houses, or to the AAAristocracy, than for “The Risky”, like the medium and small businesses, entrepreneurs and start-upscauses the banks to be able to earn much much higher risk adjusted returns on equity when lending to the former than when lending to the latter.

Do you not understand that causes serious misallocations of bank credit in the real economy, and is by itself a source of immense systemic risk for the banking system?

Now if Mr. Carney would not understand what I am talking about, then I guess I would humbly have to recommend him taking a Finance 101 refreshment.

Carney also states “The G20s aim is to turn shadow banking from a source of risk to a source of resilience”. If that is going to happen by the Basel Committee and the Financial Stability Board, with excessive hubris continuing to believing themselves to be the risk managers of the world, and thereby distorting the global financial system… then, God help us! That would only finish it off.

We are in need of swift and far-reaching actions

Sir, Lawrence Summers in "Wake up to the dangers of a deepening crisis" November 25 mentions that there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible…[and] to assure that there is a continuing flow of reasonably priced loans to credit worthy home purchasers." 

This sounds right though let us hope that with it he does not refer to a need for maintaining the prices of the houses. The more intense the market is allowed to work the shorter the adjustment period and that should really be the primary goal. This subprime bad tooth needs to be pulled out very fast if we are to avoid much worse complications.

The other thing we need to do fast is to start to comprehend the real significance of systemic errors in a globalized environment. What brought us here and what could have happened if this subprime mess had had two more years of build-up before exploiting? Let us shiver at the idea and start doing something about it. Please reign in our bank regulators and their commissars the credit rating agencies. Without them, this would not have occurred.

It’s a Baron Münchhausen moment for the US

Sir Martin Wolf in “The policy challenge of rescuing the world economy”, September 12 writes that “Prof Martin Feldstein of Harvard University pointed to a 3.4 per cent year-on-decline in US house prices” and “Prof Robert Shiller of Yale argued that the US house prices might ultimately fall by as much as 50 per cent”. Although oversimplified a division would yield that the recession carries a 15 years potential and since this is clearly unacceptable by all standards, one of the main real challenges is how to get out of the current conditions as fast as possible. Wolf mentions the need for the Chinese authorities to expand their domestic demand so that the burden of external adjustment does not fall unfairly on Europe and though he is right on his European concerns I am not that sure that Chinese domestic demand expansion would really be so helpful at this particular time for the US since China’s demand elasticity towards commodities and mid-range industrial products could be higher than the elasticity to the products offered by the US.

This looks in fact much more like what I would call a Münchhausen moment for the US, and by which I refer to that Baron’s legendary escaping from a swamp by pulling himself up by his own hair. If there was ever a moment to hurriedly correct other weaknesses in the US economy; like for instance by tort reform, health sector reforms, more strict supervisions on how much intellectual property right’s originated monopolies are exploited and the introduction of a tax on petrol consumption and that would help to take away pressures from fiscal and trade deficits while at the same time sending a better long term signal to the US economy, this is it.

Let us pray the estimates are wrong

Sir, let us pray for that the estimate that 2.2m of American families could lose their homes and that John Gapper mentions in “The wrong way to lend to the poor”, March 19, is totally wrong. If not, then let us prepare for the worst, as the political consequences of such fallout in the sub-prime mortgage market would by far surpass whatever all other thorny issues such as Iraq and the illegal immigration could all produce, together.

What I miss in this scarily good saddening and scaring article, is some words of how it came about that some 2.2m obviously individual shaky loans could have, when all was said and done, produced the sufficiently good ratings needed to attract so much money. The credit rating agencies sure must have some explaining to do, as has those Bank regulators responsible for giving the credit rating agencies so much power to begin with.