If you insist on killing it, even limited growth will be over.

Sir, I refer to Martin Wolf´s “Is the age of unlimited growth over?" October 3. It includes a recount of an interesting paper written by Robert Gordon on the slowing rate of innovations, and that should naturally also lead into the theme of how we account for growth. That when women work that is growth but when they stay home not, is only one of the many questions. 

That said, I just know that whenever a society instructs one of their primary resource allocations agents, the banks, to forget the “risky” and go exclusively for the not-risky, with an “if you do so we will allow you to hold much capital and you will be able to leverage much more and thereby obtain a higher return on your equity”, then even the age of limited growth can come to its end. 

And of course, if growth is over, there are going to be more pressures for the Martin Wolf´s of this world, those in the 1 percent of the job markets, to quit their jobs earlier, so as to allow younger generations a chance for a job, albeit for a shorter and shorter period… that is of course unless he suggests they should haul water for fun, and he wants to pay for it.

Abandon Basel III, as fast as you can, and concentrate on how to get from here to there.

Sir, your US Banking Editor, Tom Braithwaite, holds that “Regulators need to focus on enforcing Basel III rules”, October 2. As an argument he presents “We´re now two years into Basel III, which imposes tougher capital requirements on banks around the world” and that abandon those efforts would in his opinion be sort of a shame. 

What Mr, Braithwaite fails to understand is that the tougher the bank capital requirements are, the relatively scarcer bank capital becomes, and the more do the risk-weights which determine the final capital requirements, distort and discriminate in favor of the “not risky” and against what is officially perceived as risky, like lending to small businesses and entrepreneurs. 

And so, quite the opposite, I would argue in favor of abandoning completely Basel´s risk based approach for setting capital requirements, as soon as possible, and setting one simple future maximum leverage ratio for any assets, and thereafter start navigating the very difficult trajectory from here to there. 

For starters, I would begin by halving the current capital requirements for what is perceived as “risky”, and slowly starting to move up the requirements for what is seen as “not­-risky”, until both segments reach the same level, and then move up all to the target over a couple of years. 

Alternatively, or in parallel, I would offer tremendous tax incentives on all new capital subscribed by banks which commit to reaching the final leverage target for all, in one year.

In Spain, I would half, at least, the capital requirements for banks when lending to risky small businesses and entrepreneurs.

Sir, if Spain cannot target too much its fiscal budget on growth and job creation, then it must allow others to do so. In your “The many crises confronting Spain”, September 28, you hold that “some of the non-budgetary measures – such as energy liberalization and educational reform should bring about a healthier Spanish economy once the crisis is over” “Once the crisis is over”, is of course good but clearly not sufficient. 

No, if I was responsible for Spain I would immediately half, at least, the capital requirements bank need to hold when lending to “risky” small businesses and entrepreneurs, those who stand the best chance of being the creators of the next generation of Spanish jobs. 

And that I would do in the knowledge that bank lending to these “risky” have never ever created a major bank crisis, only excessive lending to the “absolute safe” like real estate, AAA rated clients and “infallible sovereigns” has cause that. 

And just the fact of explaining the true causes of the Spanish crisis, namely that bank regulators allowed the banks to lend excessively to the “not-risky” without much bank equity, could also help to create the understanding required for the consensus needed.

A question from a humble reader to any of FT’s brilliant economists, on how banks assist in an efficient economic resource allocation.

Sir, undoubtedly FT must be interested in the banks assisting in allocating resources in an efficient way. In this respect, I would humbly request that you ask some of your great economists, like for instance Martin Wolf and John Kay, to answer the following: 

Let us suppose a bank with only two types of clients, those perceived as fairly “risky” and those perceived as “absolutely not risky” 

And then let us suppose there are two different types of capital requirements for banks methods: 

The first, let us call it the pre-Basel method, which requires the bank to hold 8 percent in capital against any loans to any of their clients. 

The second, let us call it the Basel method, requires the banks to hold 8 percent in equity for loans to those considered “risky”, but only 1.6 percent against loans to the “absolutely not-risky” 

I ask this because it would seem to me that, in the first case, banks would allocate their funds in accordance to what produces the largest risk-adjusted return to them on their equity, but, in the second, they would allocate their funds in accordance to whatever produces the largest risk adjusted return equity for the particular bank equity which regulators have decided should be held for that particular  asset… and, frankly, both methods can’t be correct from an economic efficient resource allocation perspective 

I, as you must be aware of by now, believe that the “Basel method” seriously distorts the resource allocation process, by dramatically increasing the possibilities of returns on bank equity for what is officially perceived as not-risky... and thereby dooming our economies, which for instance need their "risky" small businesses and entrepreneurs to have access to bank credit in competitive terms.  

But, since FT’s economists have absolutely refused to concern themselves with this issue during so many years, no matter how many letters I sent them, that could indicate that they know something that I, also an economist, do not know. Please, help me, what class did I miss?

PS. In case it is easier for your economists to understand what I am talking about with numbers, here are some very simple. 

Suppose that the banks would, during pre-Basel method days, have set the interest rates in such a way that the loans to the “risky” and to the “absolutely not risky” produced an expected risk adjusted margins of 1 percent. This would then have provided the banks with an expected 12.5 percent return on its equity (1/.08) on any of the loans. 

But, with the Basel method, and using the previous set interest rates, though the expected return on equity for lending to the “risky” would remain the same 12.5 percent, the expected return on lending to the “absolutely not risky” would now be a mindboggling 62.5 percent a year (1/.016). 

That would of course mean that banks could lower, by much, the interest rate charged to the “absolutely not risky”, or needed to increase, by much, the interest rate charged to the “risky” in order to provide them with the same return their equity as the "not-risky". Whatever, but, pas la même allocation de ressources.

Those with medical preconditions should fret, as Lord Turner and other bank regulators want to regulate insurers.

Sir, Brooke Masters and Alistair Gray report that “FSB committee turns its attention from banks to insurers” September 27, and they write that “the industry representatives present came away hopeful that their worst fears about the plans would be averted”. 

Yes, but perhaps those who really need to fret are the “risky” insurance risks, like those with medical pre-conditions, because if regulators, like Lord Turner, would apply the same principles when regulating insurers as they do when regulating banks, the insurance company would be required to hold more capital when insuring the “unhealthy-risky” than what they would need to hold when insuring the “healthy-not-risky”. 

And that would of course mean that those qualified as “healthy-not-risky” would see their premiums lowered and those perceived as “unhealthy-risky” would see their premiums go up, precisely like what happened with the interest rates charged by banks to those officially perceived as “not-risky” and “risky”.

Basel III is dead because it is just as wrong as Basel II or even worse.

Sir, Brooke Masters writes that “Time is running out for the opponents of Basel III" as “it has been nearly two years since regulators from 27 countries struck a landmark banking reform deal aimed at preventing future financial crisis.”, “Basel naysayers delve into detail in battle to dilute reforms", September 29. That is sheer nonsense. 

If the "deal struck" had any chance to prevent better a future financial crisis then that could be correct, but, as it stands, it can only result in causing the repeat of another financial crisis, precisely because of the same reasons as the current. In Basel III, not only do capital requirements for the banks remain as in Basel II determined by the ex-ante perceived risks, favoring any assets officially perceived as “not risky”, and discriminating against assets deemed “risky”, but now, to top it up, the liquidity requirements will also do so.

I agree completely with those who want simplified rules and banks to rely exclusively on a “leverage ratio” and to that effect I have written some couple of hundred letters to FT over several years, which were all simply ignored in the name of I do not know what. 

But the real reasons for the need of change have not surfaced yet, basically because they are too embarrassing for those responsible, but they will, sooner or later, and you can bet on that. 

What happened? Bank regulators, scared witless by the possibility that bankers would expose themselves too much to assets deemed as “risky”, something that bankers never or very rarely do, created huge incentives for banks to concentrate on assets that were, ex ante, perceived as “not risky” and, in doing so, they fomented an incredible dangerous highly leveraged bank exposure to the “not risky”, something which has us already placed over the brink of disaster. 

You do not create jobs, or a sturdy economy, based on favoring the access to bank credit of the “not-risky” more than it is already favored, and thereby making it harder and more expensive for the "risky", like small businesses and entrepreneurs to access the bank credit they need. If you do so, your economy will become flabbier and flabbier, day by day, until it completely breaks down. Capice?

Why do development banks not understand that risk-taking is the oxygen of development?

Sir, you dedicate a Special Report on “The Future of Development Banks” September 24. 

As a former Executive Director of the World Bank (2002-2004), knowledgeable about many developing banks, and with over 30 years experience as a strategic and financial consultant for medium and small enterprises in a developing country (Venezuela), I again must reiterate that I find it extraordinary that development banks have not reacted against bank regulations which by favoring those perceived as “not risky” discriminate profoundly against those perceived as “risky”, like small businesses and entrepreneurs. 

Risk taking is in my mind the oxygen of any development, and I cannot therefore conceive a development path that goes through helping the “not-risky” to get ampler and cheaper access to bank credit than they would have without regulatory interference, and the “risky” to get scarcer and more expensive access to bank credit. 

For development banks to develop their possibilities to help in developing they need to embrace the “risky”… the “not risky” are sufficiently embraced anyhow.

To me, Mario Draghi is one of the regulatory devils in the eurozone drama.

Sir, Wolfgang Münchau believes Jens Weidmann’s fears of that Draghi and ECB, with an increase in the monetary supply, and the purchase of government debt, will medium term doom Europe to a great inflation, are unwarranted; or, the risks of that happening, given the crisis, are acceptable. And that is why he holds that “Draghi is the devil in Weidmann’s eurozone drama” September 24. 

I reiterate my opinion that stimulating the economy with any sort of injection, before making substantial structural changes to the economy, so as to give ground for credible hope that these injections will be productive, is an irresponsible waste of scarce fiscal and monetary policy space. And, those changes have simply not happened. 

Bank regulators, among them Mr. Mario Draghi, wanted the banks to avoid lending to the “risky” so much, that they ended up leveraging the banks very dangerously to the “not-risky”. And, pitifully, the regulators have still not understood what they did wrong. 

Any injections without a reversal of the capital requirements for banks based on perceived risk which discriminate against the” risky”, will only mean that the economy gets to be flabbier and flabbier. This is so because so many of the economy’s productive growth possibilities are to be found exclusively in the hands of the “risky”, like the small businesses and entrepreneurs. 

And so, even though I do not know all of Mr. Weidmann’s arguments and thinking, Mr. Münchau should by now know that, at least to me, Mr. Draghi is indeed one of the bank regulatory devils in the eurozone drama. And that I know without the need of reading Faust.

Is the financial transmission mechanism muddled? Yes, that is to say the least.

Sir, Gillian Tett writes that the “bigger worry is that the benefits of QE3 are so unclear, because the transmission mechanism is so muddled”, “Beware the high costs and psychology of America’s QE3.” September 21. 

And Tett reports on Richard Fisher, head of the Dallas Fed saying: “Nobody on the [Fed] committee… really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. The very people we wish to stoke consumption and final demand by creating jobs and expanding business investments are not responding to our [Fed] policy initiatives as well as theory suggests”. 

Muddled transmission mechanism indeed! How could it not be so when capital requirements for banks favor so much the lending to those perceived as “not-risky” and thereby discriminates so much against those perceived as “risky”. 

But I know for sure what is at least an absolute sine qua non to get the economy back on track, and that is getting rid of those discrimination based on perceived risks, and which almost amount to a class war waged by the “not-risky” against the “risky. 

It is the action of the “risky” which normally builds the muscles of an economy. Those “not risky” slowly, or fast, over time, most often turn into flabby fat. 

And Gillian Tett should know this after all the letters I have sent to FT, and to her, explaining the above. But, then again, as she recently wrote in “An internet free for all read by none” September 15, “People are clustering into tribes… only reading information that reaffirms their pre-existing social and political world view”, and, since I do not really belong to her mutual adoration tribe, she might not even have read my letters. 

PS. As I am putting together a Stupid Bank Regulations 101, for the benefit of those who like Martin Wolf do not get it, perhaps Gillian Tett would also like to take advantage of it.

Our economies, now turning very flabby, will soon fall into a permanent falsetto... unless

Sir, in Martin Wolf in explaining “The puzzle of the UK´s falling labour productivity” September 21 advances the possibility of one cause, suggested by Ben Broadbent of the Bank of England’s Monetary Policy Committee, namely that of “misallocation of capital dues to a defective financial system”. Wolf accepts it but does not believe it to be very important. 

Of course, if he cannot get a grip around the concept that allowing banks to leverage their equity more when lending to the “not-risky” than when lending to the “risky” introduces incredible distortions in the economy, and guarantees a flabby economy, he cannot think of it as important. 

The fact though is that funds are flowing to what is perceived as safe, and away from what is perceived as risky, in all Western economies, as a consequence of mindboggling stupid bank regulations. 

In this context, the small efforts to make up for the failings, like the one Wolf states he has proposed, namely that the government should insure the tail risk on bank lending to small and medium enterprises, are almost laughable. What he actually saying is that, insure the tail risk for these risky borrowers and then you might define them as “not-risky” and allow them access to bank credit in the same terms as those currently considered as “not-risky”. And that is not the way to go about correcting the mistakes made. 

Our economies, UK’s included, are castrated by the capital requirements for banks based on perceived risks, and, if nothing is done urgently about that, they might soon fall into a permanent falsetto.

PS. For the benefit of those who like Martin Wolf do not get it, I am trying to put together an introductory course, a 101, on the issue of Stupid Bank Regulations

The animal spirits, at least those of the banks, are not free to roam as they should.

Sir, Jesse Norman, a conservative MP in UK, writes that the recovery from a balance sheet recession, with a difficult process of deleveraging which reduces both demand and the effectiveness of monetary policy, requires not merely savvy economics, but a feel for animal spirits from policy makers”, “Britain has the political capital to boost investment” September 20. 

How I would like to sit down with Mr. Norman and explain to him how the capital requirements for banks, based on perceived risk, not only caused the explosion that brought us the balance sheet recession but, because this foolish regulatory discrimination, against what is perceived as risky, like the small businesses and the entrepreneurs is still well and alive, it also fundamentally hinders any recovery. 

Hopefully he finds time to read about it in my blog that contains my hundreds of letters, over many years, that I have written to FT on this issue, but that FT has preferred to ignore.

In the “Home of the Brave” the banks should not be induced to play it foolishly safe

Sir, James Bullard writes that after the large shock suffered by the US 2008 and 2009 “Patience is required to meet the Fed’s dual mandate”, of containing inflation and promoting employment September 20. 

It appears that Mr. Bullard believes that shock to be exogenous. I on the contrary am sure that the mega-shock was the natural result of capital requirements for banks based on perceived risks, which dramatically distorted the economy, in the US and in Europe. 

And those capital requirements are still distorting and do still discriminate against the “risky”, like the small businesses and the entrepreneurs… and, let's be honest, who can expect generating a new generation of jobs that way? 

No, if the Fed was truly serious about fighting unemployment, then it would requests that the capital requirements for banks had more to do with that objective, like basing it on potential-of-job-creation ratings, instead of on purposeless credit risk ratings, most especially since the perceived credit risks are already cleared for by the banks with other means. 

No, if the “Home of the Brave” wants to get out of a downward spiral, it cannot allow bank regulators to continue to induce the banks to play it foolishly safe. To do so, that would indeed be to inflict permanent damage on the US economy (and exactly the same, or even more, goes for Europe).

We must stop petit bank regulatory bureaucrats from distorting the markets with their risk-weights

Sir, George Magnus opines that “Draghi’s bond-buying plan is economically unsound” September 18. I fully agree with him but for a reason he does not mention, or is perhaps not even aware of. 

Most of those funds that ECB’s “outright monetary transaction” generate more sooner than later, will flow through a banking system that has become regressive, as a consequence of bank capital requirements based on risk. 

If regulators are not willing to allow the funds to flow where these could be most productive, but insist on these flowing to where they ex-ante believe these to be safer, they completely ignore the role of the market… and that is as economically unsound as it comes. 

We must urgently allow the market decide without some petit bank regulatory bureaucrats distorting its functioning by assigning, quite haphazardly, the risk-weights which decide how much capital each bank needs, and, with that, who in this bank capital scarce world, gets the loans.

Professor Summers still lives in blissful ignorance about our most urgent “magneto” problem.

Sir, Professor Lawrence Summers writes that “short run increases in demand and output would have medium to long term benefits as the economy reaps the rewards of what economists call hysteresis effect”, and that this calls for more public investment, “Britain risks a lost decade unless it changes course”, September 17. 

I can only understand that as a result of him still being in blissful ignorance of current bank regulations, which artificially favor access to bank credit, solely on the basis of being perceived as not-risky, and thereby makes the access to bank lending to those perceived as risky, like small businesses and entrepreneurs, scarcer and more expensive than normal. 

When will Professor Summers get to know that those regulations represent in fact the most urgent “magneto” problem that needs to be fixed, in the UK, in the rest of Europe and in America for our economies to run? Before that, any public investments based on deficit public budgets, and any lose monetary policy for that matter, can only threaten to further flood the engines and consume what’s left of scarce fiscal and monetary policy space.

No more QEs and fiscal stimulus. Bet on a bank stimulus for the “risky”, in America and in Europe

Sir, Wolfgang Münchau writes on “Why QE would be the right policy for Europe, too” September 17. Since I do not feel Bernanke’s QE is correct either, I cannot agree with this. 

It is high time to forget about any QEs and or fiscal stimulus, decided on an implemented by bureaucrats at a long distance from the real markets, and which have only consumed scarce monetary and fiscal space, with very little sustainable to show for it. 

Instead we need the banks to direct those stimulus flows to where these are most needed and could be the most productive. And this, governments can do, without asking anyone’s permission, or worry about any unconstitutionality. All it takes is that they instruct the bank regulators to drastically reduce the capital requirements for banks when lending to what is perceived as risky small businesses and entrepreneurs. 

Would this be reckless? Not at all, or at least much less than when allowing the banks to hold very little when lending to what is perceived as not-risky, precisely the type of exposures that have always been behind any major bank crisis.

If a new QE is politically mistimed I do not know, but it sure is still economically mistimed

Sir, I refer to your “Bernanke’s latest round of easing”, September 16, where you comment on Romney arguing on Bernanke bailing politically out Obama. 

I do not know if this latest QE is mistimed because of political reason, I do not really care about that, but what I do know, is that not only the latest but the all the former QEs, and fiscal stimulus too, have been mistimed because of economic reasons. 

Having had frequent experiences in workouts, I know you do not inject any fresh funds into any failed project, until you at least believe you have made the changes required for its success. And, as far as I know, central banks and governments, confronting the crisis begun in 2007, have been wasting away immense monetary and fiscal spaces, like if there was no tomorrow, without imposing any sort of changes in then economy. 

As an absolute minimum, central banks and governments should have eliminated those ridicule regulations that make it so hard and expensive for those perceived as “risky” to access bank credit, like the small businesses and entrepreneurs… precisely those who generates the jobs that Bernanke now says he cares so much about.

Interest rates are low, but the ratio of rates to the “risky” over the rates to the “infallible” is probably the highest ever.

Sir, John Authers quotes Deutsche Bank’s market historian Jim Read on us “entering the unknown” with respect to the interest rates being “so low, for so long, for so many”, and he writes in UK “the base rates are at the lowest in 318 years, “London property market cannot avoid mean reversion” September 10. 

Absolutely, but those are the rates for those in the center rated absolutely safe, those so much favored by accommodating capital requirements for banks. If he wants to see a quite different story, he should look at the ratio between the interest rate charged to the “risky”, those living in the periphery, like small businesses and entrepreneurs, divided by the interest rate charged to the officially “infallible”, and he might then find that ratio larger than ever. 

If the current mean, which has resulted from these capital requirements is to revert to some historic standard then regulations should also conform to a historic standard. 

Authers also writes “Bank of England’s balance sheet is its biggest, compared with the size of the UK economy, since the records began in 1830”. But, to get a real grip on the true monstrous size of that balance sheet, he should perhaps also include how much QE all those commercial banks, acting almost as quasi-branches of the central bank, have provided to government’s treasury, because that requires little or no capital of them.

FT, do the “not-risky” need additional help accessing bank credit and the “risky” need to be hindered more?

Sir, do you really think that giving those perceived as “not risky”, like those rated AAA, regulatory assistance in their access to bank credit, and which of course translates into hindering the same more for those perceived as risky, like a small business, is an acceptable and worthy distortion of the market? 

Apparently you do, that is unless you have not yet been able to understand, what capital requirements for banks based on perceived risk does.

Dumb bank regulatory nannies… talk about a real hazard!

Sir, James Mackintosh in “ECB bazooka faces peripheral tests” writes about ECB’s recent “grand plan to save the euro” and of the moral hazard “that Spain or another beneficiary fritters away the savings from cheaper financing in order to please voters”. 

The hazard of that moral hazard is relatively small when compared to the hazard of having banks regulated by nannies who do not understand what they are doing. 

When a regulator allows a bank to have less capital, only because a borrower is perceived as “not-risky”, he is effectively, de facto, discriminating against those perceived as “risky”, like the small business and entrepreneurs. And, discriminating against the access to bank credit of these so needed “risky” risk-takers is, more or less, a death sentence to our economies.

FT, your protégé Draghi, before any audacious gamble, should dismantle overly-cautious-nanny bank regulations

Sir, in your “Mario Draghi’s audacious gamble” September 7, you write: “The eurozone’s financial market is fragmenting. The wide divergence of rates between different countries is raising fears that the monetary policy mechanism may be broken.” 

That is correct, but again you do not mention how current bank regulation, with its capital requirements based on perceived risk, fragmented the markets, and is now responsible for the widening of interest gap between those countries officially perceived as absolutely safe and those as “risky”. 

For those regulations, your protégé Mario Draghi is very much responsible, and so before any “audacious gamble”, he would do much better dismantling those really dumb overly-cautious-nanny regulations.