FT, do not silence the fact that for our youth to find jobs, banks must return to risking it with “the risky”

Sir, in “Struggling youth” you refuse to even mention what I know is one of the most fundamental causes why our youth is struggling to find jobs, and about which I have written you some hundreds of letters.

And so here we go again: Regulations which allow banks to hold much less capital for exposures considered “absolutely safe” than for exposures considered “risky” translates directly into banks earning a much higher expected risk adjusted return on the “absolutely safe” exposures than on the “risky” exposures. And that as you should be able to understand discriminates directly the access to bank credit of all those small and medium businesses and entrepreneurs who can provide our youth with jobs.

As is, all our banks are going to end up gasping for oxygen on some stupidly overpopulated ex-absolutely-safe beach… and that is not how jobs are created.

For the sake of our youth, swallow your silly pride and don´t silence this.

PS. The truth about how incredibly wrong current bank regulations will come out sooner or later and then FT´s silence on it, will shame it. I invite you to for instance take a look here on page 21-24 http://www.scribd.com/doc/149858219/Journal-of-Regulation-Risk-North-Asia-Volume-V-Issue-II-Summer-2013

And Anat Admati and Martin Hellwig have also in "The Banker's New Clothes" written the following about risk-weighted assets:

“The risk-weighting approach gives the impression of being scientific”.

“The risk-weighting approach is extremely complex and has many unintended consequences that harm the financial system. It allows banks to reduce their equity by concentrating on investments that the regulations treats as safe.”

“The official approach to the regulation of bank equity, enshrined in the different Basel agreements is unsatisfactory… the complex attempts in this regulation to fine tune-equity requirements – for example, by relying on risk measurements and weights- are deeply flawed and create many distortions, among them a bias against traditional business lending.”

And recently in “The Parade of the Bankers’ New Clothes Continues: 23 Flawed Claims Debunked”, “the studies that support the Basel III proposals are based on flawed models and their quantitative results are meaningless. For example, they assume that the required return on equity is independent of risk”.

The pillar of Basel bank regulations being based on “flawed models” and “meaningless results” and FT is silence on this? Amazing! That on its own is worth a book.

Again, we would do better with capital requirements for banks based on sustainability of earth and job creation ratings

Sir, I often wonder about how strange it is that those who most present themselves as being very concerned with the health of our planet, and should therefore one would presume be the ones most concerned with making sure that scarce financial resources are used as effectively as possible to save the earth, then end up being the most willing to just throw money at the problem.

I say this because Martin Wolf in “Why the world faces climate chaos”, May 15, argues that “If we are to take a prudential view of public finances we should surely take a prudential view [on saving for humanity] the only home it is likely to have”. As I see it those two prudential views go hand in hand, as we do need a prudential view on public finances in order to assure having some resources for all the prevention, adaptation and mitigation which will be required.

Two fundamental problems the world faces everywhere now, is the deteriorating environment of the earth and the lack of jobs for our youth. And in this respect for almost a decade now I have been arguing the following:

If we have capital requirements for banks which clear for the information provided by credit ratings, even though that information has already been cleared for elsewhere, and thereby only produces dangerous distortions, why then do we not have instead capital requirements for banks that are based on sustainability of earth and job creation ratings?

The above would allow banks to play a significant role in solving both problems, without us having to leave the financing of environmental or job creation projects in the hands of government bureaucrats or short terms political interests. Unfortunately there are some who prefers the government to solve it all… seemingly that is on their agenda.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has told me not to send him anything more about these “capital requirements”… he already knows it all, at least so he thinks.

Spain, Europe, America, should not bank credit go to the most profitable projects, those that generate jobs and growth? It does not!

Sir, I read Sebastian Mallaby’s “Spain is in need of urgent repair”, November 21, and though I agree with much there said, it does not even mention the urgent need for bank credit to go to the most profitable projects, to those that generate jobs and economic growth. 

Currently and for the last decade that it does not! Overly frightened bank regulatory nannies, caring not a iota about the purpose of bank credit, decided to allow banks to hold much less capital when exposed to “The Infallible” than when to “The Risky”.  And that signifies of course that banks will be earning much higher expected risk-adjusted returns when lending to The Infallible than when lending to “The Risky”. 

As an example, if any European bank wants to lend to a small businesses or an entrepreneur it needs, according to Basel II, 8 percent in capital and can therefore leverage 12.5 to 1. But if that same European bank lent instead to a sovereign rated like Greece was recently, it could do so holding only 1.6 percent in capital, for a mind-blowing 62.5 to 1 leverage. 

If Spain, Europe, America want to have a real chance to get out of this monumental financial imbroglio they find themselves in, they need to get themselves a complete new set of bank regulators who also care about growth and jobs. 

I do not live in Europe but, if I did, I would sure be part of an Occupy the Basel Committee for Banking Supervision movement… and frankly if I lived in Spain I would be demanding some relief in the capital requirements for banks on exposures that have a special potential to create jobs for the young.

To create jobs, we should start by firing the current bank regulators!

Sir, Sebastian Mallaby in “The US labour market does not work” August 22, reduces the discussion about the increasing unemployment to an issue about the government incentives for the workers to work, which is important, but leaves out completely the much more important angle of creating the new generation of jobs that will provide its own incentives to work. 

Let me just hint at one possibility. If the capital requirements for our banks were partially based on the potential of job creating ratings, instead of as now on the perceived risks of default of which have already been considered by the bankers, our small businesses and entrepreneurs might stand a chance to deliver us the new jobs we need and want. 

Frankly, one of the best ways of getting jobs is putting the current generation of bank regulators who do not understand one iota about the need for risk-taking, out of a job.

Bank regulators, allow America to be the Home of the Brave

Sir, Jeffrey Sachs in “The US has already lost the battle over government” August 16, writes “ Mr. Ryan’s budget is nothing short of heartless in the face of the dire crisis facing America’s poor”. 

Hold it there Professor Sachs! I get too nervous about the poor, when someone recurs to arguing considerations based on the heart in order to service their needs. What was much worse for them than any heartlessness was the senselessness of bank regulators, that which caused the current crisis. 

By allowing banks to hold minimal capital when lending or investing in what was officially perceived as not-risky, regulators effectively discriminated against those perceived as “risky”, like small businesses and entrepreneurs, and doomed the banks to useless and obese exposures to what was or is still officially perceived as not risky. 

If there is anything that Republicans and Democrats should offer, as Americans, that is to wipe away the regulatory discrimination against what is perceived as risky and allow the US to fully be “the Home of the Brave” again… and that by the way would also do Europe a lot of good. 

And, if your bank regulator absolutely must mess around with market signals, so that they feel they have earned their salary, then why do you not ask them to base their capital requirements for banks on job creation and environmental sustainability ratings instead? That way they would at least serve a purpose.

Professor Stiglitz, why do you not come down to earth and have a look at the so mundane bank regulations?

Sir, Professor Joseph Stiglitz writes that “The American labour market remains in shambles” March 13. Of course, but how could it be otherwise! We are suffering under the thumb of thick as a brick bank regulators who give banks huge incentives to lend or invest in anything officially perceived as not-risky, like triple-A rated securities and infallible sovereigns, and to avoid like pest what is officially perceived as risky, namely those most important new job creators of all, the small businesses and the entrepreneurs. 

In various occasions I have with no luck tried to explain to Professor Stiglitz that excessive bank exposures to what was erroneously ex ante perceived as absolutely not risky, does not really match up with excessive risk-taking, but is more the result of an excessive regulatory induced risk-adverseness. 

Much of our current problems derive from the fact that for the aristocrats of economic, such as Nobel Prize winners, bank regulations are something very mundane, almost low class, and to be treated with the same importance given to an Ikea sofa assembly instruction.

It is time we give our banks a purpose different than that of surviving.

Sir, Mort Zuckerman in “How we can get America working again” February 25, as so many do, identifies the lack of jobs as one or perhaps the most serious challenge facing all here, there, and everywhere.

If that is so and our banks are supposed to allocate capitals why do we not throw out those capital requirements for banks based on perceived risk, and which obviously did not serve us well, and adopt capital requirements based on job creation potential as certified by job creation rating agencies?