Central banks seem not able to tell their magic porridge pot to stop

Sir, Robert Armstrong, Oliver Ralph, and Eric Platt make a reference to the fairy tale of the magic porridge pot writing “Every working day, $100m rolls into Berkshire — cash from its subsidiaries, dividends from its shares, interest from its treasuries. Something must be done with it all. The porridge is starting to overrun the house.” “‘I have more fun than any 88-year-old in the world’” Life&Arts, April 27.

And the magic porridge pot fairy tale ends this way on Wikipedia: “At last when only one single house remained, the child came home and just said, "Stop, little pot," and it stopped and gave up cooking, and whosoever wished to return to the town had to eat their way back”

Sir, the excessive stimuli injected by means of QEs, fiscal deficits, ultra low interest rates and incestuous debt credit relations, like the 0% risk weighting of the sovereign that provides credit subsidies to who provides banks with deposit guarantees, or loans to houses increasing the price of houses allowing still more loans to houses, against very little capital… all of that is the porridge of our time.

And it’s clear central bankers everywhere, have no idea of how to tell their pot to stop.

Will we be able to eat our way back? Not without sweating it out a lot at the gym. You see too much porridge, meaning too much carbs, and too little proteins, meaning too little risk taking, produces an obese not muscular economy. 

@PerKurowski

A mindless structural reform of regulations castrated the banks and helped to kill the dynamism of the economy.

Sir, Martin Wolf quotes Robert Gordon with “Ours is an age of disappointing growth because the technological breakthroughs are relatively narrow”, and then dicusses what could be done. Wolf concludes “The tendency to believe that some “structural reforms” will fix this is, similarly, an act of faith. It is essential for policy to promote invention and innovation, so far as it can. But we must not assume an easy return to the long-lost era of dynamism”, “An end to facile optimism about the future” July 13.

But “structural reforms” can kill dynamism too. And as you Sir and Wolf already know, in my opinion, nothing has done more harm to the economy than the risk weighted capital requirements for banks introduced with Basel I in 1988, and applied much more intensely with Basel II in 2004.

By allowing bank to leverage more their equity, and the support they receive from society with “safe” assets, regulators made it harder for those perceived as risky, like the SMEs and the entrepreneurs, to compete for access to bank credit.

Since perceived risks were already cleared for with the size of the exposures and the risk premiums charged, having bank clear again for those same perceptions in the capital, basically castrated our banks.

Now banks no longer help provide the “risky” proteins the economy needs in order to grow new muscles, they just finance the “safer” carbs that only makes the economy more obese.

Sir, when compared to what is needed to give the future a fair chance to deliver something good, it is clear that never ever before has a generation consumed so much borrowing capacity to sustain its own current consumption.

PS. And with their zero risk weight to sovereigns, and 100% of citizens, bank regulators de facto stated that government buracrats make the best use of bank credit. If that is not runaway loony statism what is?

@PerKurowski ©

With their credit risk weighted capital requirements for banks, regulators doomed our economies to obese growth.

Sir, you refer to growth in the US and hold that the “bearish case for the US rests on the travails in China, and events in the oil market, conspiring to expose “The small but serious threat of a US recession” February 6.

You, as you have done the last decades, simplistically suppose all economic growth is equal. But, the truth is we can have obese economic growth, based on carbohydrates, such a financing consumption, housing and refinancing the safer past; or we can have muscular economic growth, based on proteins, such as taking risks on SMEs and entrepreneurs. And guess which one of these is the sustainable growth?

Ever since regulators, with their credit risk weighted capital requirements, set the banks on a credit risk aversion path, all growth we have perceived has been of the not sustainable obese type.

So no! Whatever happens in China, or with the oil price, if the US, and Europe, insist on having the same failed bank regulators regulating their banks, their economies will go downhill more sooner than later.

You quote Bill Dudley, president of the New York Federal, as noting, in your face, “credit conditions have already tightened as risk aversion has caused a selloff of risky assets.

Dudley should be ashamed. As one of the regulatory community he must know that regulators, long time ago, de facto gave banks the incentives they needed to avoid creating “risky” assets. They made bankers’ wet dreams, that of making the highest expected risk adjusted profits when financing what was perceived as the safest, come true.

@PerKurowski ©

We need a free finance sector able to feed proteins to the real economy, not one regulated to only feed it carbs.

Sir, I refer to Tim Harford’s “What’s the diet for growth?” August 22.

Harford states: “research reminds us that we shouldn’t simply bash ‘banking or ‘finance in some generic way, blaming the banks for anything from the weather to the struggles of bees. We need to look at the details of what the financial services industry is doing, and whether financial regulations are protecting society or making things worse… The truth is that we desperately need a strong banking sector.”

Absolutely, but foremost we need a free banking sector able to deliver a balanced diet of credit to the real economy, one that includes proteins.

In an Op-Ed in 1997 I wrote: “If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, but presiding over the funeral of the economy. I would much prefer the regulators to put some blue jeans on and try to help to get the economy moving.”

And in April 2003, as an Executive Director of the World Bank, in a written statement presented to the Board I pleaded: "Basel dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. Once again, the World Bank seems to be the only suitable existing organization to assume such a role." 

I said so because I thought that as the world’s premier development, bank the World Bank would know risk-taking is the oxygen of any development. 

Sadly, neither World Bank, nor anyone else, wanted to assume such responsibility and so the world got stuck with portfolio invariant credit-risk weighted capital requirements for banks. That guaranteed the economy is fed a diet of bank credit based almost exclusively on carbs, unable to provide it the nourishment needed for sustainable economic growth. 

And, to top it up, those capital requirements, which are extremely small for what is perceived as safe, also guaranteed too many banks to become too obese to fail.

@PerKurowski