The privileged subsidizing of sovereign debt that apparently shall not be named

Sir, let us suppose that as credit risks, banks perceived Martin Wolf and me as equally risky or equally safe. We would then, for the same amount of borrowings, be charged the same risk adjusted interest rate.

But then suppose that for whatever strange reason, regulators allowed banks to leverage much more with loans to me than with loans to Martin Wolf, and so banks would therefore obtain higher returns on equity when lending to me than when lending to Martin Wolf.

And also suppose that for some even stranger reason, Bank of England would buy my loans from the banks, but not those loans given to Martin Wolf.

Clearly the result would be that I would be able to borrow much more and at much cheaper rates from banks than what Martin Wolf could.

Would Martin Wolf in such a case opine that the higher interest rates he had to pay was the result of the market?

I ask this because Martin Wolf frequently makes reference to the very low rates that many sovereigns have to pay, and holds they should take advantage of it by borrowing as much as they can, in order to invest for instance in infrastructure.

And Martin Wolf seemingly refuses to consider those “very low rates” a consequence of regulatory favors of sovereign debts and QE purchases of it.

That distorts the allocation of credit in such a way that, de facto, regulators and central banks believe bureaucrats / politicians know better what to do with credit they’re not personally responsible for than for instance entrepreneurs. 

In the best case I would call that crony statism, in the worst outright communism. 

One day future historians will recount, and Paris’ Musée de L’Homme exhibit: “1988 Basel I: When Regulators introduced Financial Communism”

Martin Wolf do not low rates on Treasuries depend quite lot on how these are favored by bank regulators?

Sir, its hard for me to follow Martin Wolf’s explanation of the “Reason for low rates is real, monetary and financial” “World Economy” October 9. For instance what does he mean with “The saving glut was a casual factor. But its impact came via monetary policy and the financial system, and so via financial booms and busts”

That said, since he mentions low Treasury yields that according to Andy Haldane, the Bank of England’s chief economist “are the lowest real interest rates for 5,000 years” I do have a question for him.

Mr Wolf, would it not be possible that those ultralow interest rates are supported by the fact that the least capital the capital scarce banks need to hold against assets, are those they need to hold against their sovereigns… their governments… the Treasuries?

Does Martin Wolf believe Treasury yields would be so low if bank had to hold as much capital against Treasuries than what they are required to hold against risky SMEs and entrepreneurs? I mean the current risk weight for Treasury is zero percent, while the risk weight for a private American unrated SME and entrepreneur is 100 percent.

Zero percent – 100 percent… truly amazing!

At one place Wolf mentions with respect to one explanation: “one has to argue that the crisis was just the result of foolish deregulation and wild profit seeking in an irresponsible sector”. No! I argue that it was just the result of foolish regulation that allowed profit seeking banks to earn much higher risk adjusted returns on equity on safe assets than on risky assets. But seemingly I do not express myself too clearly either, as there is no way I can be understood by Mr. Wolf.

@PerKurowski ©  J

Central banks’ Friedman helicopter pilots have no idea about how to spread quantitative easing and low interest rates

Sir, Ralph Atkins report that "Central bankers face ‘confidence bubble’” August 28.

With respect to central bankers as bank regulators you know very well it’s been a long time since I have had any confidence in them. They are so lost in the labyrinth of their own making.

For instance they are now also supposed to base their monetary policy on the job rate, and so they pour liquidity and low interest rates on the economy while at the same time, with their risk-weighted capital requirements, they make sure that does not go as bank credit to “The Risky”, the medium and small businesses, the entrepreneurs and start-ups… those who could create the next generation of jobs. How crazy is not that?

Really, how smart is it of the central bankers to believe ordinary lowly bankers to be so blind and so dumb so as to require them to hold 5 times as much capital when they lend to someone they know has a BB- rating than when they lend to someone they know has an AA rating?

Or, inversely, how smart is it of central bankers to believe ordinary lowly bankers when they argue they could hold only a fifth of capital when lending to someone who has an AA rating, than what they should hold when lending to someone with a BB- rating?

I can’t help to ask myself what Friedman would have to say about the ability of the current central bank’s helicopter pilots. I am sure he would be aghast at their stupidity.

PS. FT, dare to ask!

European savers, leveraging only once their capital, stand no chance to compete with banks for good rates on “safe” savings

Sir, I refer to Alice Ross’ “Central bankers seeks to quell rate anger” November 14. In it she refers to the problem of German savers finding extremely low returns when placing their money, into what is supposedly very low risk.

Jens Weidmann, the president of the Bundesbank, argues that there is no discrimination among European savers and that they are all equally affected. That may be… but there is an underlying regulatory distortion that discriminates strongly against all individual savers, in favor of the banks.

When European banks are allowed to leverage their capital 60 or more times for exposures to absolutely-safe havens, rates will be very low in these. And the poor individual saver, leveraging his own capital just once, stands no chance to compete for a decent rate.