In 1988 one year before the Berlin Wall fell another wall was constructed, one which separated sovereign and private bank borrowings.

Sir, I refer to Ben Hall’s “State ownership back in vogue 30 years after fall of Berlin Wall” August 15.

The only real competitive advantage those in favor of SOEs can argue, is that governments usually have cheaper access to credit, so why put it in the hands of private investors who need to expect higher returns. 

But in 1988 by means of the Basel Accord 1988 the risk weighted bank capital requirements were adopted. With these banks were allowed to hold sovereign debt against much less, sometimes even zero capital, than what these had to hold against loans to the private sector. As a result the interest rate differences between private and public debt started to grow and with it, the SOE’s competitive advantage, and so we should not be too surprised about these being “back in vogue”. 

To illustrate my point just let me ask: Sir, where would the interest rates now be for the 0% risk weighted sovereign Italy, this even though it takes on debt not denominated in a domestic printable currency be, if Italian banks needed to hold as much capital against these as what they must hold against loans to Italian entrepreneurs?

PS. Here my letter to the Financial Stability Board

PS. Here my recent letter to the IMF

@PerKurowski

Privatizations of public services, which could have been very good, just ended up as cozy crony statism deals.

Sir, Hannah Roberts discussing privatizations in the Italy of 1990’s writes, “The state turned to private entrepreneurs, offering favourable terms to extract the maximum possible capital from the sale”, “Inquest on Italian privatisation” September 5.

I do not know much about Italy, but that describes perfectly the problem from which we in Latin America suffered a lot when many of our public services were privatized. The concessions, instead of being awarded to those who offered the best and cheapest services to the users, were awarded to those who offered the most immediate income to the redistribution profiteers of turn.

The government got the money, and we consumers were set up to have to repay all that money, at high expected return on equity rates, with higher tariffs or prices. It was, as I so often publicly denounced it, a hidden taxation through privatization.

Andrea Cioffi, undersecretary at the ministry for economic development and a Five Star senator is quoted with, “There has always been a tendency to favour big companies, backed by pressure groups. Italy in the 1990s was like Yeltsin’s Russia when public companies were given to the oligarchs. Everyone was looking out for their friends, rather than the public interest.” 

Sir, twice is “crony capitalism” mentioned in this piece. When are we going to use the correct term of crony statism?

@PerKurowski

Are taxes on petrol correctly used? Repatriation of what “cash”? End users/payers of infrastructure should be present

Sir, Gillian Tett, discussing the financing of president Trump’s plan for infrastructure writes: “One sensible, overdue step would be to raise the petrol tax to pay for infrastructure; another would be to use proceeds from repatriated overseas corporate cash.” “Private money might yet save Trump’s infrastructure plans” May 26.

First, more taxes on petrol just means that more money goes into the same fiscal pocket to be channeled in often quite non-transparent ways to uses that might or might not include the building of infrastructure. The best use of taxes, such as those on petrol, which by the way constitutes de facto a discriminatory import tax on gas, is to transparently help fund a Universal Basic Income scheme.

Second, “cash”, what cash? Could Ms. Tett believe that high denomination bills stored under corporate treasurers’ mattresses represent that cash? Before opining anything about what “cash” could do, I suggest she finds out how that “cash” is currently deployed. Who knows, it might all be invested in gilts.

Finally, I have witnessed decent privatizations and infrastructure PPPs in my life, but I have also seen those that are only ugly expressions of crony statism. In this respect at the negotiation and executions phases of any privatization, any public infrastructure project, or any PPP, future users, or otherwise payers for the projects or the services, should be present… and their names publicly recorded as having represented the citizens.

Too often most of us see something very wrong that makes us reflect: “This would not have been the case had my grandfather or grandmother overlooked what was going on.”

@PerKurowski

Governments best take big decisions, when there’s no conflict of interest, no stupid groupthink, and contestability.

Sir, I come from an country, Venezuela, where privatizations of public owned utilities were based not on who would provide us citizens the best services, but on who would provide the state with the highest upfront payment… an anticipated tax revenue for the government, to be paid later by us citizens by means of higher than needed tariffs, for decades to come. And, to top it up, that was accused of being odious neo-liberalism product of the Washington Consensus. 

That’s why when I read Martin Wolf’s “Big energy decisions are best taken by government, not the market” of September 16… I immediately reacted… “Hold it there, take it very easy!”

If government is going to take big decisions, as it should, we must make sure all its possible conflicts of interest are removed, and that the decision process is transparent and guarantees contestability, and not just the result of a small mutual admiration club of technocrats/bureaucrats.

For instance, allowing bank regulators to impose their statism of a 0% risk weight for the Sovereign and a 100% risk weight for “We the People”, was wrong.

And allowing bank regulators to impose risk weighted capital requirements for banks based on the ex ante perceived risks of bank assets, and not on the ex post risks conditioned on the ex ante perceived risks, was utterly stupid. What’s the chance of something really bad happening from something perceived as “safe”, and what is it for something “risky”?

Wolf lectures us: “Rational risk-taking by individual financial businesses will create substantial threats for others. This, too, is a spillover, or “externality”. Financial regulation has to internalise such externalities, thereby reducing the likelihood of crises and making them more manageable when they arrive. One way to do so is to raise capital requirements far above what profit-seekers would wish”

I argue that much more important than that, is to get rid of the credit-risk weighting of the capital requirements that only distorts the allocation of bank credit to the real economy while serving no bank safeness purpose, much the contrary. Wolf, in spite of hundreds of letters I have sent him over a decade on this issue, has yet to understand that.

And Wolf ends “The government must have the courage to make… difficult decisions and the wisdom to make them well.” Yeah, yeah, yeah, but what if the decision makers are dumb and we are not allowed to correct them… because so many want to suck up to them nevertheless (like in Davos)… or because some are interested in exploiting that dumbness? 

@PerKurowski ©

If IMF seems to favor the private sector, rest assure it is favoring even more its shareholders, the governments.

Sir you write “International Monetary Fund last week…published an article questioning its own neoliberal tendencies…concluding that “instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion”. And you describe it, marvelously imaged, with that “In seeking to be trendy, the IMF instead looks as out of date as a middle-aged man wearing a baseball cap backwards”, “A misplaced mea culpa for neoliberalism” May 31.

My opinion though is that if a mea culpa should be forthcoming from the IMF that should have more to do with how they allowed the label neoliberalism to cover up for statism. For instance most public services privatized in Latin America were awarded based on who offered to pay the governments the most, not on who offered to charge the lowest tariffs; and so all money received became de facto tax advances to governments, to be later covered by customers having to pay higher tariffs. Neoliberalism? Hah!

John Williamson coined the term “The Washington Consensus” that was rightly or wrongly adopted as a stand in for neoliberalism, in 1989.

The year before, the Basel Accord, determined that for the purpose of setting the capital requirements for banks, the risk weight of sovereigns, at least those of the OECD, was zero percent, while the risk weight of citizens, the private sector, was 100 percent.

What neoliberalism can thrive along side such virulent statism as that displayed by the Basel Committee?

Let us not fool ourselves; IMF represents the governments, not the private sector, not the citizens. If it does something that seems to favor the private sector, the citizens, rest assure it is by doing so favoring governments even more.

@PerKurowski ©