Preferential access to bank credit for those buying houses have also turned houses in attractive investments, and so a house is no longer just a house

Sir, I refer to Sarah O’Connor’s “Cities only work if they accommodate rich and poor” March 21.

She is correct although it would be more precise saying that cities only work if they accommodate all those workers required to make a city work.

Here is my take on this issue.

By politicians and regulators giving so much preference to the purchase of houses, the prices of houses have been inflated beyond reflecting the need of houses, and so have also turned houses into attractive investments. That has created a financial disequilibrium because most workers who would anyhow struggle to pay for just houses, will find it impossible to service mortgages that also reflect the value of investment assets.

Most politicians would naturally want to be seen as helping people buy affordable houses, but they do wrong in that. What they should do is to help people to be able to afford housing, something which is absolutely not the same thing.

Before we clear out this distortion, our cities will suffer from what O’Connor’s describes. Alternatively, current house asset owners, might be required to start building houses where they allow the indispensable workers to live at a reduced rate… something that could affect the value of their houses.

In many places that are too distant for the firefighters to arrive in time, we have already heard of building houses in order to provide homes close by to these.

PS. For the purpose of the capital requirements for banks regulators have risk weighted  residential mortgages with 35% and loans to entrepreneurs with 100%, which means bank can leverage much more with residential mortgages than with loans to entrepreneurs, which means banks earn much higher expected risk adjusted return on equity with residential mortgages than with loans to entrepreneurs, which mean we will end up sitting in houses without the jobs that could provide the income to service mortgages or utilities.

PS. How much of current house prices is the direct result of easy financing? I ask because it would be interesting to know how much we are financing with easy financing of houses the easy financing of houses.

PS. One of the biggest pension crisis will be when we see all those who trusted houses to be safe investments, trying to cash out in order to convert these back into main-street purchase capacity to use in older days L

PS. Too much preferential finance for the purchase of houses, which increases demand for houses, which increases houses prices, and turns safe homes into risky investment assets, also promotes inequality as those without a house are further left behind… until L

@PerKurowski

The biggest operational risk the real economy currently faces, are bank regulators who do not understand they distort

Sir, Lorenzo Bini Smaghi discusses the difficulties of quantitative easing to be of any use in the context of “the excess of savings over investments, at the global level but again particularly in Europe.” “If easing is not Europe’s answer, an alternative is elusive” March 4.

Once again, for the umpteenth time, I remind you that much investment is not taking place only as a consequence of the distortion in the allocation of bank credit to the real economy produced by the risk weighted capital requirements for banks. These hinder the access of SMEs and entreprenuers to bank credit, only because regulators perceive these as “risky”… as if bankers had no idea about that risk.

I repeat: Those perceived as “risky” are by that fact alone, ex post, made safer. Those perceived as “safe” are by that fact alone, ex post, made riskier. .

“The only thing necessary for the triumph of evil is for good men to do nothing” Edmund Burke

“The only thing necessary for bad regulations to reign, is for specialized media to keep mum about it” Per Kurowski

@PerKurowski ©

The most important investors for the economy of tomorrow, are those who act on its margin, like SMEs and entrepreneurs.

Sir, Martin Wolf writes: “Because corporations are responsible for such a large share of investment, they are also, in aggregate, the largest users of available savings”. And he lashes out at corporations for not doing enough investments. “The corporate contribution to the savings glut” November 18.

Yes, corporations are the largest users of available savings, but that does not mean they are those who move the investments on the margin. Those most important, on the margin investors, are those tough risky risk-takers we need to get going when the going gets tough. And those are the ones who have their fair access to bank credit blocked by the credit risk weighted capital requirements for banks… since banks will always preferentially access to assets against which it has to put the least of its own equity for… especially in times of scarce regulatory bank capital.

I know that Martin Wolf does not understand or does not want to admit the distortions in the allocation of bank credit that credit-risk weighting regulation does, but that does not make it one iota less distortive.

PS. Amazing. Martin Wolf even suggests we should think about taxing retained earnings to force corporations to invest and not of getting rid of those regulations that block the access to bank credit for investments. Much of that corporate cash is in banks and in the unproductive "safe havens"

@PerKurowski ©

Insurance: Is anyone looking at how Solvency II might affect investments in the real economy and the premiums to pay?

Sir, Alistair Gray writes about how investors in the insurance industry are struggling to assess the impact as European regulators finalize details of Solvency II regime, “Insurers face crunch over new capital rules” September 1.

Is anyone looking at how Solvency II might affect the investments of the insurance companies in the real economy?

Is anyone looking at how Solvency II might affect premiums for covering different risks?

The answer to both those question is most probably a “NO!” That because regulators molded in credit-risk weighting traditions, clearly do not care one iota about such minutia.

So what could the consequences of Solvency II then be for other than the investors?

First, it will certainly create incentives for insurance companies to hold more of safe “infallible assets”, and so there will be additional demand for sovereign debt and less demand for riskier assets… like long term investments in infrastructure projects. And so the safe havens will be further dangerously overpopulated and the riskier but perhaps worthier bays even more underexplored.

As for the insurance clients let me speculate over what it could imply in terms similar to those applied by the Basel Committee to banks. For instance when selling health insurance to smokers and non-smokers.

Traditionally insurers looked at actuarial risks of smokers and non-smokers in order to decide on the premiums to charge and the exposures to accept, and that was it. But, now, it could be that since regulators believe the smokers are “riskier” than the non-smokers, Solvency II could have in mind using the same actuarial studies in order to set higher capital requirements for insuring smokers than insuring non-smokers. That would of course mean that the spread in premiums paid by these two groups would increase… and drive up any inequalities.

@PerKurowski