October 06, 2014
Sir, Martin Wolf explores if quantitative easing “An unconventional tool” has worked” October 6. He fends off much criticism of QE with arguments that could make a savvy defense lawyer blush, namely that it should not be accused of weaknesses and risks that it shares with other monetary policies.
My continuous criticism of QE, and that Wolf ignores, is that if QE is done in conjunction with the current credit risk-weighted capital requirements for banks, it will help the safe havens to become dangerously overcrowded, while “the risky” bays, those the economy most need, will remain totally and even more dangerously unexplored.
Wolf mentions the possibility of a “helicopter drop”, retrospectively, but, for that to happen, the QE liquidity would have to be soaked up and returned without the existence of the silly guidance mechanism used by bank regulators.
There can’t be any sturdy economic growth in sending our banks to occupy the terrain where orphans, widows and pension funds used to roam, in order to wait for money to drop on them.
Which also leaves us with one question about the civilian casualties of QE. Where do risk-adverse savers save when what is “most-safe”, pays interest rates below the risk-free rate, as a result of sovereign debt being subsidized by the fact that banks do not have to hold much or any capital against it?
September 03, 2014
Sir I refer to Claire Jones “Draghi’s new deal”, September 3.
In it Jones writes “The message: Paris and Rome must reform their economies, removing barriers to the creation of business and jobs”.
Well Mario Draghi, as the former chairman of the Financial Stability Board, and therefore much responsible for current bank regulations, should be ashamed of himself.
I say this because perhaps no barrier stand as high against the creation of business and jobs, than the current credit risk-weighted capital requirements for banks, which have only to do with the short term stability of banks (not the long term) and not one iota with the creation of business and jobs.
It must be demolished, so that bank credit can again flow in fair terms to the “risky” medium and small businesses entrepreneurs and start-ups, and without whose help no economy can move forward.
Were Draghi in an act of contrition, to confess his mistake, and help to "tear that wall down", history might be more lenient with him… though that might be difficult considering how much of Europe’s youth might have already been condemned to form part of a lost generation only because of the regulators' so idiotic and so dangerous risk aversion.
August 28, 2014
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.
August 25, 2014
Sir FT, are you allergic to the idea that SMEs, entrepreneurs and start-ups lend our economies a helping hand?
Sir in “Central banks at the cross-roads” August 25, you describe the cross-roads in terms of whether central banks and governments are, with fiscal and monetary policies, to help or not to help.
You do not include the crossroad that rids of the discrimination against “the risky” present in the risk-weighted capital requirements for banks. Doing so would allow banks to once again lend to medium and small businesses, entrepreneurs and start-ups. Are you allergic to the idea that they should have a chance to help out?
August 15, 2014
Sir, again, sort of for the umpteenth time, you insist in that “Europe now needs full-blown QE” August 15.
Although you do not want to confess it, perhaps because for some really petty reasons, I know you are perfectly aware that the risk-weighted capital requirements for banks, acts like a roadblock that would stop any liquidity provided by quantitative easing, to reach by means of bank credit, those Europe most need to reach, namely medium and small businesses, entrepreneurs and star-ups.
Why would you want to waste what must be some quite scarce European quantitative easing before removing that boulder?
July 21, 2014
Sir, I refer to your “Eurozone needs quantitative easing” July 21. No! It cannot handle more distortions.
Before getting rid of the capital controls that risk-weighted capital requirements for banks represent, and which channels new liquidity to whatever is officially perceived as absolute safe, and not to where the economy most needs bank credit to go, any Eurozone quantitative easing would be plain foolish… and set the eurozone up for something even worse.
And to top it up, you suggest that quantitative easing should be carried out through the purchase of government bonds, as if the zero risk weighting of eurozone government bonds is not distortion more than enough.
July 05, 2014
Sir, Henny Sender makes a well argued call in “The Federal Reserve must not linger too long on QE exit” July 5; concluding with opining that “The Fed wants to have its cake and eat it too”, and asking “Might it be that the Fed has everything in reverse?" It is truly scary stuff!
On August 23, 2006, you published a letter I sent titled “Long-term benefits of a hard landing”. Therein I wrote:
“Sir, While you correctly argue (“Hard edge of a soft landing for housing”, August 19,) that “even if gradual, a global housing slowdown would be painful” you do not really dare to put forward the hard truth that the gradualism of it all could create the most accumulated pain.
Why not try to go for a big immediate adjustment and get it over with? Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom in a couple of decades.
This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.”
And now Sir, soon eight years later, we can only observe how the Federal Reserve, even when facing clear evidence all what their liquidity injections and low rates have achieved is increasing or maintaining value of existent assets, and little or nothing has it done for the creation of any new real economy… are unwilling to cut the losses short, and keep placing more and more bets on the table… with our money!
Sincerely, no matter how we look at the Greenspan-Bernanke and incipient Yellen era at the Fed, we have reasons to fret the existence of some fundamental lack of character.
PS. Of course, when it comes to banks, the regulators have already evidenced plenty lack of character with their phobia against “the risky”. And so now they also have our banks placing ever larger bets on what is “safe”, blithely ignoring that in roulette, as in so many other aspects of life, you can equally lose by playing it too safe.
March 31, 2014
Sir, Wolfgang Münchau comes strongly out in favor of a quantitative easing program of well over $1tn… among other “to get banks to sell assets to the ECB, the proceeds of which they would use to lend to companies”, “Central bankers talk far too much and act to little” March 31.
I wonder, with current risk-weighted capital requirements for banks, would that lending to companies really result in a for the real economy efficient way? It would not! For that, better than QEs, is to get rid of those entirely unmerited regulatory distortions against the access to bank credit of “the risky”, medium and small businesses entrepreneurs and start-ups.
And since lately there has been quite some outrage over the unequal distribution of wealth, should we not consider that QE’s, the way they have been designed, are really drivers of inequality? In that case, why not a cheque to every European instead, and then take it from there? Please don’t let anyone fool you, ECB, by buying specific type of assets, is handing out lots of free cash to some few.
March 06, 2014
Sir I refer to your “The BoE’s big test is yet to come” March 6.
You write “QE has increased wealth inequality” true, but then, sort of as an excuse, you hold that “some of this inequality is temporary and will be reversed when the monetary support is withdrawn”. A truly astonishing statement that can only be interpreted in the animas of Keynes’ “in the long run we are all dead”.
And then you write: “QE… failed to produce the kind of sharp rebound policy makers had hoped for… The banks have failed to lend to smaller enterprises, which would have helped to spur growth”. True, but then again, as a sort of excuse you hold that “the BoE does not decide what banks… do with their money”. And that Sir you should know by now, at least from my over 1000 letters to FT on the subject, is a completely false statement.
BoE, by approving of different capital requirements for banks for different assets, based on ex ante risk perceptions, allow banks to earn different risk-adjusted returns on equity for different assets… and if you think that does not represent the kind of carrots and sticks that make banks decide what to do with their money, then you might be in need of some time out in order to collect your marbles.
January 14, 2014
Sir, Avinash Persaud argues “central bankers need… a better understanding of what their bond-buying has achieved”, “An expensive way to speak truth to financial markets” January 14.
Absolutely! From all what we read central bankers do not understand yet that those “Cash balances… trapped in a broken system”, are a direct consequence of capital requirements for banks which do not allow for liquidity to go to where it is most needed in the real economy, namely to finance “risky” medium and small businesses, entrepreneurs and start ups.
I fully agree with Persaud in that the first QE could be explained, and even justified, based on the need “to unfreeze markets that were close to seizing up”… but, from there on, no way Jose!
If the distortion produced by the current risk-weighting of bank regulations is not eliminated, so that the invisible hand of the market can resume operations, can you imagine what would happen if the Fed would even try to soak QEs up, I mean with so much hullabaloo already resulting from some tiny tapering?
December 21, 2013
QE is a drug that has been applied by the Fed in an emergency without going through any FDA type testing procedures
Sir, Barry Eichengreen considers that “The Fed’s monetary tweak is a tempest in a teapot” December 20.
But, considering the fact that the monthly reduction of $10bn in QE gets so much more attention than the $75bn that the Fed will keep on injecting in the economy, in a quite distortive way, all on the long side of the market, all for the treasury and the housing sector, then perhaps a teapot being in a tempest, could be a more adequate simile.
Eichengreen also holds that “the central bank has signaled that it is not prepared to return to normal times until a normal economy has returned”. Sorry, then we might never get there.
A normal economy will not return until regulators stop using risk weighted capital requirements for banks. Because these allow banks to earn much higher risk-adjusted returns on equity financing the infallible sovereigns and the AAAristocracy than when financing the “risky” medium and small businesses, entrepreneurs and start-up, they do the facto guarantee the market to be abnormal.
And Eichengreen ends by referring to Hippocrates… “It has at least done no harm” What? Is that not something yet to be seen?
December 14, 2013
Sir, Ian Buruma writes "If the new elites in the global economy want to stave off the storm of destructive hatred, they had better to come up with some ideas of their own on how to temper the market forces", "Global forces are uniting populists against the elites", December 14.
I do not presume forming part of any elite but yet I need to question that our current problems are derived from allowing too much market forces to reign. I suggest there is plenty of evidence which points in the opposite direction.
For instance, our banks are now subject to risk weighted capital requirements, which translates directly into allowing these to earn much higher risk adjusted returns on equity on assets deemed as “safe”, than on assets deemed as risky. It beats me to know what this has to do with markets.
And then we have the whole TARP and Quantitative Easing affairs, and which in all truth might point to an urgent need to temper the intervention by governments in the markets.
November 19, 2013
I may be right, and I may be wrong. But do you not find it in at least curious that what I argue is not even discussed?
Sir, Henny Sender writes “Five years after the meltdown, it is clear the Fed´s quantitative easing is not about a real economic recovery, it is only about generating the liquidity that gives rise to incomes for the rest of us are not rising at all”, “Fed easing fuels growth in wealth over real economy”, November 19.
As you know very well I hold that is because the financial transmission channel is totally damaged. Capital requirements for banks based on ex ante perceived risks, more risk more capital, less risk less capital, make it completely impossible for banks to allocate credit efficiently in the real economy.
I may be right and I may be wrong, but do you not find it curious somehow that the possible distortion these capital requirements might produce is not even discussed?
And that is not because I am a complete loony. As you know very few, much less in high places, like as an Executive Director of the World Bank, warned in such clear terms about the problems.
Boy you sure seem like a very complacent bunch of journalists to me.
October 05, 2013
FT, don’t scare or bullshit us, with that September and October labor data is indispensable for the Fed to know what to do.
Sir, Robin Harding reports that “Experts fear loss of October data could influence tapering policy” October 5. Boy if that is what we depend on for the Federal Reserve to act correctly, we are, as the somewhat vulgar expression goes, most certainly up shit creek without a paddle.
He also quotes an expert saying “It’s like flying blind”. Come on, the Fed is flying truly blind by not knowing what would be the real interest rates on public debt, net of the subsidies implicit in bank regulations which allow banks to lend to the public sector against much less capital than when lending to citizens. Compared to that blindness the labor data would be, also in a somewhat vulgar expression, chicken shit.
That the Fed, not having a clue about what to do, would naturally like to have that data in order to explain itself, well that is a quite different proposition.
September 23, 2013
If banks and QE finance sovereigns, housing and AAAristocracy, who is to finance “the risky”? You and me? Widows and orphans?
Sir, I refer to John Authers’ “Side-effects that should call time on the QE medicine” September 23.
The market, as the compass that directs the allocation of financial resources, has been rendered useless by the introduction in its center of two big chunks of iron. The first is capital requirements based on ex ante perceived risk, the other is QE. If these sources of magnetic distortion somehow neutralized each other, for instance QE mirrored the deleveraging of the banks the economy might not head too much out of course. But, unfortunately, they just reinforce each other.
The capital requirements push banks to lend to sovereigns, housing and the AAAristocracy, and QE, buying sovereigns to ease the borrowing rates of government, and help housing, push in the same direction. The question which remains is then who is going to take care of financing the risky. Truth is that if we get out of this storm alive and are able to find safe harbor, we can count ourselves extremely lucky indeed. As is what is most probable is that we end up sitting in million dollar houses, without a job, to help us pay the utility bills.
August 08, 2013
The state, instead of taking on more risks, should reorient its risk-taking, towards more basic research
Sir, from what I see from many letters, it would seem that Mariana Mazzucato’s “The Entrepreneurial State”, and Martin Wolf’s review of it, is unleashing a call for the state to run more risks on behalf of society.
Indeed, there is a big and unquestionable role for the state in helping to fund and carry out basic research, but, since the state takes enough risks already on behalf of taxpayers, like with fiscal deficits and quantitative easing, should not the real call be for the state to reorient its risk-taking?
And again I have to remind you. If a bank lends to a small private entrepreneur to carry out some risky research, it is required to have 8 percent in capital but, if it lends to the state so that the state performs exactly the same function, with tax-payer’s money, then the banks needs to hold zero capital. Frankly, is that not risking enough on the state’s capability for you?
July 31, 2013
Is Mark Carney allowed not to tell the truth in order to make consumers and companies feel more relaxed?
Sir in “Mark Carney’s risky revolution” July 31 with respect to “forward guidance” you write that “Mr Carney believes guidance can provide extra monetary stimulus at a time when interest rates are already ultra-low. Consumers and companies will feel more relaxed about borrowing if the central bank reassures them it does not intend to hike rates soon.”
That begs the question whether Mark Carney or any other Bank of England governor must tell the truth and only the truth, or is he really allowed bending the truth, in order to have consumers and companies feeling more relaxed?
Is that why they hired a Canadian?
Is that why they hired a Canadian?
July 30, 2013
In banking, what is perceived as “absolutely safe” has always access to the largest loans, at the lowest interest rates and easiest other terms. And that is why all bank crises have resulted from excessive exposures to what was ex ante believed as absolutely safe but that, ex post, turned out not to be.
In the same vein what is perceived as “risky” always receives the smallest loans, at the highest interest rates and harshest other terms. And that is why no bank crisis has ever resulted from excessive exposures to what was ex ante believed as risky.
And therefore bank regulations, like the current, which allow much lower capital requirements for banks on loans to what is perceived as “absolutely safe” than for loans to what is perceived as “risky” are plain silly and do not make the banking system safe.
And worse, by allowing banks to make higher expected risk-adjusted returns on equity when lending to “The Infallible”, like to the sovereign and the AAAristocracy, than when lending to “The Risky”, like ordinary businesses, these regulations also completely distort the allocation of bank credit within the real economy, making it unreal, with awful consequences.
Sir, and since Ben Bernanke, being the one most responsible for all quantitative easing, has evidently not understood how broken the current financial transmission mechanism is, I cannot agree with the first part of the title of Mike Konczal’s “Bernanke did well, but the Fed must do better” July 30.
But, of course, I wholeheartedly agree with his plea for the Fed to do better... but that should begin by eliminating the regulatory discrimination against perceived credit risks which have already been cleared for in other ways.
July 27, 2013
Sir, Richard McGregor in “Acrimony grows over Fed chair decision” July 27, quotes Bob Corker, a Republican senator saying “but we’d like to have someone that shows more modesty, from the standpoint of what the Federal Reserve can do, relative to spurring our economy on”.
That is absolutely correct, after all these years with bank regulators arrogantly thinking they can play risk managers of the world and allow for different capital requirements for different bank assets based on ex-ante perceived risks, all without even thinking about how this distorts the markets, there is nothing we need more than modesty and humility in our financial bureaucracy.
Just look at how much resources have been spread out by the Fed’s quantitative easing programs without caring about the financial transmission channels being all fouled and plugged up by these regulations.
July 10, 2013
Mr. John Kay, a clogged tube, not a “leaky bucket”, stops quantitative easing from helping the real economy.
Sir, I refer to John Kay´s “Quantitative easing and the curious case of the leaky bucket” July 10.
Kay fears that quantitative easing “may not benefit the non-financial economy much, but they are helpful to the financial services sector and those who work in it.”, and he is right.
But the allegory of the leaky bucket is not perfect, because what we, if plumbers, would have in front of us, is more a curious case of a voluntarily clogged tube.
And I refer of course to that tube through which bank credit is supposed to flow to the real economy, but which has now been clogged, on purpose, by bank regulators, by means of inserting a higher capital requirements cork, to assure that bank credit does not flow to “The Risky”, like to small and medium businesses and entrepreneurs.