By not asking all the questions that need to be asked, journalists also fail society.

Sir, Henry Manisty writes “financial journalism plays a vital role in upholding the integrity of financial markets”, “EU regulators have form on obstructing journalists” November 9.

Indeed, but in many respects, financial journalists have often failed society by not doing that. For instance, here are just three examples of questions that should have been posed directly to the regulators, long ago.

We know that those excessive bank exposures that can be dangerous to banks and bank systems are always created with assets perceived as safe, never ever with assets perceived as risky. Therefore, can you please explain your risk weighted bank capital requirements based on that what’s perceived as risky is more dangerous than what’s perceived as safe?

Before risk weighted bank capital requirements credit was allocated on the basis of risk adjusted interest net margins and a view on the portfolio. After that it is allocated based on risk adjusted returns on equity; which obviously those that banks can leverage less with, e.g. “risky” SMEs and entrepreneurs. Explain how this does not distort the allocation of bank credit?

Even though none of Eurozone sovereigns can print euros on their own, for your risk weighted bank capital requirements you decreed a zero-risk weight for all of their debts. What do you think would have happened in the USA if it had done the same with its 50 states?

Sir, paraphrasing Upton Sinclair one could say that “It's difficult to get a journalist to ask something, when his salary, or being invited to Davos, depends on his not asking it.”

PS. My 2019 letter to the Financial Stability Board (FSB)

What we have is not by a long shot economic liberalism, it is much more statism, and of the crony kind.

Sir, Martin Wolf refers to Yascha Mounk of Harvard University arguing “that undemocratic liberalism, notably economic liberalism, largely explains the rise of illiberal democracy: ‘vast swaths of policy have been cordoned off from democratic contestation’, [carried out] by international agreements created by secretive negotiations carried out inside remote institutions.” “Saving liberal democracy from the extremes” September 25.

Hold it there! The Basel Committee for Banking Regulations, with Basel I of 1998 decided, without any real public consultation, that the risk weights for those risk weighted capital requirements it itself concocted, were to be 0% the sovereign and 100% the citizens. What has to do with “economic liberalism”? Nothing! To me it is pure unabridged statism… that is unless it is derived from pure unabridged stupidity.

Ignoring that allows Wolf to opine, “What is true is that poorly managed economic liberalism helped destabilise politics… and to argue, “Elites must promote a little less liberalism” 

Again, no! Mr. Wolf (for the umpteenth time), we are not living a time of “poorly managed liberalism”, we are living thru times of expertly camouflaged statism, that which is so beneficial to the redistribution profiteers and to those of the private sector who love to engage in crony statism.

Sir, all journalists, even those considered its elite, have a duty to denounce that; less they might be accused of covering it up. I mean should not journalists be the citizens’ frontline for any “democratic contestation”? 

How many times have I asked Martin Wolf to use his influence to ask the regulators: “Why do you want bank to hold more capital against what’s perceived as risky and is therefore less dangerous to our bank system, than what is perceived as safe and that, precisely because of that, becomes so much more dangerous to it? Hundreds? Has he dared to ask it? Not that I know Sir. Though perhaps he just did not like the answer or the non-answer 

@PerKurowski

Good global economic governance also depends on the Financial Times of the world doing their duty by questioning diligently.

Sir, you write “The world economy is in good health. Global economic governance is not. The first remains acutely vulnerable to the second… Davos produced few ideas on compensating for US destructiveness” “The gaping hole in global economic governance” January 27.

No! The world economy is not in good health. Just look at all current world debt contracted to kick the 2007/08 crisis can forward, to finance current consumption and to inflate stock markets with excessive dividend payments and buy backs; and then compare it to how little of that debt has been used to finance future production.

And whatever US destructiveness you want to identify, it would pale when compared to the destructiveness caused by bank regulators with their risk weighted capital requirements for banks.

Sir, in a world were sleaziness abounds everywhere and for so many reasons, you find it more worthy of the Financial Times to launch a full-fledged investigation “without fear and without favor” of an all male-charity dinner; than daring for years to ask bank regulators some basic questions like:

Why do you want banks to hold more capital against what has been made innocous by being perceived as risky, than against what is dangerous because it is perceived as safe? Is that not setting us up for too big to manage crises?

What went through your mind (what did you smoke) of the Basel Committee allowing with Basel II banks to leverage a mindboggling 62.5 times their capital only because an AAA to AA rating issued by human fallible rating agencies was present?

Is being a safe mattress under which to stash away our savings a more important objective for our banks than allocating credit efficiently to the real economy? “A ship in harbor is safe, but that is not what ships are for.” John A Shedd

Why should you, as a regulator, want with lower capital requirements favor bank credit to what’s already favored by being perceived as safe, and thereby cutoff more the credit to what is already disfavored by being perceived as risky?

Why did you assign a 0% risk weight to sovereigns? Is that not runaway statism? If it is because sovereigns can always print money to pay back their loans, don’t you know that is precisely one of the real and worst risks with sovereigns?

As is, don’t you know you are dooming our economies to subprime performance and our banks to end up gasping for oxygen in some overpopulated safe-havens?

And that’s just for starters:

FT is as much at fault as anyone for the absurdness of current global governance of banks. Sir, this could also be referred to as sleazy journalism.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

To apply the Socratic method successfully requires students to be somewhat interested in the questions.

Sir, with respect to Lucy Kellaway’s "End of Term Diary” (December 23), David Parker writes: “It’s the teacher’s job to facilitate and motivate. Show students the beauty of things. And, teach by the Socratic method. Ask a question. If the student doesn’t understand, ask another question. Keeping asking. When they understand, they’ve learned” “Teach by the Socratic method — keep asking” December 30.

I have tried to apply the Socratic method during years trying to make Financial Times understand the mistakes of risk weighted capital requirements for banks. Among the questions:

Why do regulators require banks to hold more capital against what has been made innocous by being perceived as risky, than against what has become dangerous by being perceived as very safe?

Why did regulators not define the purpose of banks before regulating these?

Why did bankers use as input for their risk weighted capital requirements for banks the intrinsic risks of bank assets and not the risk of those assets for the banks?

Why do regulators not understand that allowing banks to leverage differently with different assets will distort the allocation of bank credit? And, if they understood that, who gave them the right to distort? Etc. 

But FT shows no interest in these questions… so I have to find another method… any idea Lucy Kellaway?

@PerKurowski

Crony capitalism, which is really crony statism, includes many crony relations with central banks and bank regulators

Sir, Mohamed El-Erian writes about Jackson Hole meetings 2017: “The symposium left open questions for markets that, given very profitable adaptive expectations, are conditioned to rely on central banks to boost asset prices, repress financial volatility and influence asset class correlations in a way that rewards investors and traders more.” “Yellen and Draghi had good reason for Jackson Hole reticence” August 29.

So instead of relying on the real economy, Mohamed El-Erian, and I presume all his colleagues operating in the financial markets, rely more on what central banks do.

That is so sad, especially since the risk weighted capital requirements for banks, hinders all central bank stimuli to flow where it should. We now have buyback of shares, dividends financed with low interest rate loans, house prices going up, but SMEs and entrepreneurs not getting their credit needs satisfied because the regulators feel these are "Oh so risky!"

El-Erian reports: “Janet Yellen, chair of the US Federal Reserve, and Mario Draghi, president of the European Central Bank — [told] politicians about the importance of financial regulation”

That only happens because politicians have not dared to ask regulators questions like:

Who authorized you to distort the allocation of bank credit in favor of those perceived, decreed and concocted, as “safe”, like sovereigns and AAArisktocracy, and away from the “risky”, like SMEs and entrepreneurs?

Where did you find evidence that those perceived as risky ever caused major bank crisis? As history tells us, these were always, no exceptions, caused by unexpected events, like those ex ante perceived as very safe turning up, ex post, as very risky. 

PS. Do bankers love these crony relations? You bet! Being able to earn the highest expected risk adjusted returns on equity on what is perceived as very safe, must be a wet dream come true for most of them. And besides, by requiring so little capital, and therefore having to serve much less any shareholders’ aspirations, there is much more room for their outlandish bonuses

@PerKurowski

Contrary to Gordon Brown, current bank regulators do not dare to take questions, they might not be able to answer

Sir, as truly responsible elite should behave, Lucy Kellaway takes society at task with her “There is nothing cute about innumeracy” May 8.

In it Kellaway refers to how a kid, almost 20 years ago, asked Gordon Brown, then Chancellor of the Exchequer, “what is 13 squared?” and got a correct answer.

I argue that the current risk weighted capital requirements for banks are dangerously nonsensical, and that is why I have been asking bank regulators many questions about these, during about 20 years too. I have not had that kid’s luck.

For instance, when I ask why they give what is AAA rated, that we know banks could be building up dangerous exposures to, a risk weight of only 20%, while the so innocuous below BB-, that which bankers would not touch with a ten foot pole, is handed a 150%, their eyes go blank, and they nod to each other either “what the hell is he talking about?” or “does he not understand that risky is risky and safe is safe?”

If I ask them how much they feel authorized to distort the allocation of bank credit to the real economy in pursue of an elusive financial stability, then they ignore me completely.

Frankly, how can a society allow its banks to be regulated by those that, knowing as they should that bank capital is to be there to cover for the unexpected, are so dumb so as to base their capital requirements on what’s expected?

Here follows a link to some of my many questions that have never received an answer.

http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

How is it that “Without fear” FT, contrary to that young kid who asked Gordon Brown, does not dare to ask bank regulators these questions?

@PerKurowski

Instead of for known unknowns or unknown unknowns, regulators require banks to hold capital against believed knowns

Sir, Ray Soifer writes: “Dennis Kelleher (Letters, April 19) is right that we do not really know how much capital is necessary to prevent catastrophic bank failures. Indeed, we will never know, because not all the risks faced by financial institutions are “known unknowns”. Some of them will always be “unknown unknowns” until after the fact. Thus, there will always be need for effective supervision and market discipline: the other two legs of Basel’s “three-legged stool”.” “Unknown risks explain need for bank oversight” April 22.

But our bank regulators came up with the brilliant idea that banks should hold capital against what could be seen as perceived known knowns. With their risk weighted capital requirements they doubled down on those perceptions of risk that already influenced decisions on the amount of exposure the bank wanted to hold, and the interest rate to be charged.

So what is perceived safe, which can then be held with less capital, now signals even more safety; and what is perceived as risky, which requires more capital, signals even more riskiness.

Sir if you make the “safer” safer and the “riskier” riskier, do you really think the banks will allocate credit efficiently to the real economy? Of course not!

The “safe” like sovereigns, AAA-risktocracy and housing will get too much access to bank credit; and the “risky” like SMEs and entrepreneurs too little.

“Need for effective supervision” By whom, those who do not understand the distortions they are causing?

“Need for market discipline” What market, that who is now so utterly confused by the risk weighing?

The craziness of this capital requirement regulation is unbelievably large… and therein lays the major obstacle. I hear you: “They can’t be so dumb”. Yes Sir, don’t doubt it, they can!

Sir, “Without fear and without favour” dare ask regulators the following questions:

http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

@PerKurowski

Could not artificial intelligence, AI, sometimes prove more intelligent and socially concerned than humans?

Sir, John Thornhill writes: “Mireille Hildebrandt, professor of law and technology at the Free University of Brussels, says one of the dangers of AI is that we become overly reliant on “mindless minds” that we do not fully comprehend. She argues that the purpose and effect of these algorithms must therefore be testable and contestable in a courtroom. “If you cannot meaningfully explain your system’s decisions then you cannot make them,” she says.” “Only human intelligence can solve the AI challenge” April 18.

Indeed, but that should go for humans too! For instance bank regulators should be hauled in front of a courtroom, in order to answer some very basic questions about their risk weighted capital requirements for banks.

I ask this because I am absolutely sure that, if AI regulated our banks, then at least the following two questions would have been asked:

What is the purpose of banks? And something like John A Shedd’s “A ship in harbor is safe, but that is not what ships are for” would have been considered.

What causes big bank crises? And something like Voltaire’s “May God defend me from my friends, I can defend myself from my enemies” would have been considered.

As a consequence we would not be having our banks being regulated to avoid the risk taking the future of our grandchildren need, for no real bank stability purpose at all.

Here follows some of the questions that I would like to ask the current bank regulators in front of a court, since they do not even acknowledge hearing these.

http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

@PerKurowski

Is it so impossible that something really better could come out from Brexit, for all? Is EU that strong or good?

“We have considerable scope to see things as we prefer to see them” writes Tim Harford, a sensitive liberal internationalist, and then goes on to comment on Brexit with “The EU would benefit from a deal, but the UK needs one desperately.” “Beware the ostriches pursuing a pact” April 1.

That is an argument, in different wordings that I read repeatedly in the Financial Times. It much reminds me of the anti-Trumpists; they have too much vested emotional interest in things turning out bad. They can’t wait for that impeachment that will allow them a definite “we told you so”… and what sufferings is produced on that route is of secondary order.

I of course am not at all pleased with the concept of Brexit (or a Trump presidency) but, as a Venezuelan, I have seen how a puritan opposition can only make things worse.

Do not allow technocratic thugs to take over Brexit negotiations. If there is one message a sensitive British liberal internationalist should at least continuously be asking EU’s sensitive liberal internationalists is: After Brexit, do you want to become a better EU, or is that really indifferent to you?

That Sir because, as I have told you before, I believe Britain will be able to manage any major sacrifices that might result from Brexit, much better than EU any minor sacrifices without Britain.

Harford writes: when “cringing [scared] behind the nearest piece of furniture, trouble lies ahead. Indeed that ostrich effect will simply allow technocratic thugs to take over Brexit negotiations… and Sir that is truly scary… where it not for them there would be no Brexit to begin with.

PS. “terrifying parts of Doctor Who”. Out in the real world it is important to be sure about what really should terrify you. For instance, bank regulators think of what is perceived as risky as something terrifying, ignoring that the really scary parts always turn up among what has been perceived as very safe. As a result they got their risk weighted capital requirements for banks all wrong… and they have still not been able to reconcile their fears… and we’re all paying for it. That is really terrifying, for real.

PS. Do Financial Times journalists need their editor’s permission to ask banks regulators these questions?

@PerKurowski

FT’s future history exam draft, leaves out questions that could question some who are not to be questioned now

Sir, Gideon Rachman tries to imagine the questions future historians will ask about today’s political events drafts a history exam for students graduating in 2066, “An exam paper from the future” September 6 

I can certainly imagine a couple of other interesting questions, the problem though is that including these, would question some who are currently active and would not like to be questioned, like perhaps the exam-drafter himself

For instance:

How come regulators, with risk weighted capital requirements, decided without any empirical analysis, that what is perceived as risky is riskier for the banking system than what is perceived as safe?

How come regulators, by allowing banks to leverage equity differently with different assets, did not understand they would be distorting the allocation of bank credit to the real economy?

How come leading financial newspapers, and its journalists, mostly ignored the thousand of letters sent to them by a reader and that were related to those two previous questions?

@PerKurowski ©

If they do not belong to her The Group, the tribe, Gillian Tett does not seem to read what her readers write to her.

Sir, Gillian Tett writes “Echoes of 2008 as danger signs are ignored ” and mentions the “Jackson Hole tribe barely mentioned these at all”. “We had all better hope that by the summer of 2017 a debate about finance gets a proper billing at Jackson Hole” September 2.

I invite you here to read the probably more than hundred letters I have sent Ms Tett over the years, but that she has decided to ignore, probably because I do not belong to her The Group.

Who am I? Just a former Executive Director of the World Bank who, in October 2004, in a formal statement delivered at the Board wrote:

“Phrases such as ‘absolute risk-free arbitrage income opportunities’ should be banned in our Knowledge Bank. We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

In January 2003, in FT, I warned “that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

Here are more of my documented early opinions (1997-2004) on bank regulations

So what would I like Ms Tett to do? To be more than a groupie and do her job asking those she might meet in Jackson Hole, Davos and similar The Group meetings, some of the too many questions that have gone unasked by journalists over the last soon 30 years, like:

How have you defined the purpose of banks before regulating these?

“A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

Why do you base your capital requirements on the ex ante perceived risks?

“May God defend me from my friends. I can defend myself from my enemies” Voltaire.

Had Tett, or any other important financial journalist, like Martin Wolf, asked some of these questions much earlier, we might not have the need to even reference 2008.

The Basel Accord, Basel I, 1988, set the risk weight of the Sovereign at 0% and that of We the People at 100%... which de facto means that regulators believe government bureaucrats give better use to bank credit than the private sector… something that most of us on Main Street and who are not runaway statists, would find sort of questionable.

@PerKurowski ©