Tim Harford, why should the 2008 bank crisis have reminded even an "undercover" economist of that “banking matters”?

Sir, Tim Harford writes: “If 2008 was a sharp reminder that banking matters, then 2016 has reminded us that politics matters too” “Prediction in an age of uncertainty” October 29.

Obviously this has to be a statement made by a deskbound undercover economist, or by one of his current bank regulation technocrats colleagues, and not by a main-street economist. If there is little as important to an economy’s real day-today, always, that is the access to bank credit, especially in a Europe so dominated by banks.

Here Harford also writes about predictions in age on uncertainty, without seemingly having understood that the Basel Committee’s capital requirements for banks were predicated on believing in a 100% world of certainty.

Harford refers to Nicholas Bloom concluding in that “uncertainty also causes recessions because it makes consumers, employers and investors hesitate before spending money. And if we all hesitate, that is exactly what a recession looks like.”

Sir, but what is more hesitation than that what bank regulators showed, when they decided banks should not be able to leverage as much with what they perceived as risky than with what they perceived as safe… as if banks had ever done such thing.

@PerKurowski ©

There’s a difference between unwanted recessions and recessions resulting from having other priorities than growth

Sir, Robin Harding asks whether we should use the term recession for an economy that is decreasing as a consequence of demographics. “Recession is a word in need of a rethink” November 14.

He sure has a point and perhaps we should measure economic growth on a per capita basis.

In the same vein, may I express doubts on whether we should use the term recession when the decreasing economic growth is a direct consequence of calling it quits… meaning not wanting to risk what we already got in order to get anything better.

Because, calling it quits that is what bank regulators did, when they allowed banks to earn higher risk adjusted returns on what is perceived ex ante as safe, than on what is perceived as risky.

I mean should there not be a difference between an unwanted recession and a recession that results from prioritizing other wishes?

Most current “recessions” are not unexpected consequences they are the natural results of someone meddling with the markets.

@PerKurowski ©

Why does not FT, “without fear”, debate the distortions the credit risk weighted capital requirements for banks cause?

Sir, Martin Wolf writes that if that if “hysteresis” — the impact of past experience on subsequent performances” is the cause for the economy failing to recover its “Possible causes [could] include: the effect of prolonged joblessness on employability; slowdowns in investment; declines in the capacity of the financial sector to support innovation; and a pervasive loss of animal spirits” “In the long shadow of the Great Recession” November 11.

For more than a decade I have tried to explain for Mr. Wolf that, if you allow banks to hold less capital against assets that ex ante are perceived as safe than against assets perceived as risky, you allow banks to make higher expected risk adjusted returns on equity on safe assets than on risky, and that of course will decline the willingness of the financial sector to support innovation and erodes the animal spirit. When banks make the good returns on equity, on for instance financing houses, why on earth should they go an finance what requires them to hold more capital and is therefore harder to achieve good ROEs for?

But Martin Wolf, and FT, has never wanted to accept that as a serious source of distortion in the allocation of bank credit. I have never understood why. I dare him, or FT, or any bank regulator for that matter, to a public debate of that issue… come on, show us some of the “without fear”

Thomas Hoenig the Vice Chairman of FDIC has recently said: “Using simple leverage measures instead of risk-based capital measures eliminates relying on the best guesses of financial regulators to guide decisions.” I pray he is able to convince his colleagues of that. The world has had more than enough of that reverse mortgage regulators imposed and that makes banks finance more the safer past than the riskier future.

When I think of those millions of young people who will never get a chance of jobs that help them fulfill dreams, thanks to these hubristic and outright incapable regulators, I get so sad and mad.

PS. Here is a letter that Washington Post published today.

@PerKurowski ©

It seems experts guilty of totally absurd bank regulations, have managed to enact a powerful Maxwellisation process

Sir, in reference to what could be "The policy choices of high-income countries” taken in order to weather a slowdown, Martin Wolf writes: “politics has almost universally ruled out fiscal expansion; the intervention rates of central banks are near zero; and, in many high-income economies, private leverage is still quite high. If the slowdown were modest, nothing much might be done. The best response to a big slowdown might be “helicopter money”, created by the central bank to stimulate spending”, “A new Chinese export — recession risk” September 15.

Wolf shies away from commenting on how banks are doing and if they are prepared to help out… or even allowed doing so. Many are screaming for higher capital requirements, which, if imposed, would constrain overall lending, especially the kind of risky lending that is most needed when the going gets tough.

Just look at what happens if a company looses a good credit rating. Then immediately banks are required to hold more capital against loans to that company, which reduces their capacity to lend to others, or even forces them to offload other assets.

Today, next to Wolf’s article, John Kay refers to “Maxwellisation… a process by which the … powerful obstruct criticism of their actions” “The tale of the crook and his obstructive legal legacy”.

Clearly current bank regulations issued by the Basel Committee, not only distort the allocation of bank credit in good times but being extremely pro-cyclical are also unhelpful in slowdowns. The lack of possibilities to question these regulations, which includes FT’s silence… makes us therefore wonder whether we are facing a Maxwellisation process enacted for their benefit by bank and ex bank regulators, and other supposed experts on the subject.

PS. Or is it more like what John Kenneth Galbraith wrote: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”?

@PerKurowski

Are bank regulations and their effects something that is beneath the dignity of financial academicians to study?

Sir, Lawrence Summers writes: “The financial crisis, the great recession and sharp increases in inequality have all properly led to a negative reassessment of the functionality of unfettered free markets.” “Complacency and incrementalism are traps to avoid” July 13.

That is because he, as most of economy/financial academicians, have not had any interest in studying what bank regulators have been up to. Had they done so, and had they understood how current credit-risk-weighted capital requirements for banks distort the allocation of credit to the real economy… they would not speak of “unfettered free markets”… that is unless it is part of their political agenda.

Basel Accord of 1988 indicated risk weights of zero percent for loans to OECD governments and 100 percent for loans to the private sector. That translated into allowing banks to leverage over 60 times when lending to governments and only about 12 times when lending to the private sector. “Unfettered free markets”? You’ve got to be kidding!

Let us break down the components:

1. The financial crisis: All bank assets that turned into major problems had in common that regulators allowed banks to hold these against very little equity.

2. The great recession: Since regulators require capital scarce banks to hold more equity against loans “the when the going gets tough the tough gets going” SMEs and entrepreneurs than against “safe” assets… there is no chance to get out of the recession in a sustainable way.

3. Increases in inequality: By banks, because of these capital requirements, negating opportunities to “the risky” inequality must prosper.

I rest my case ... at least for some minutes J

@PerKurowski

The quality of its unemployed is also vital for the strength of a nation

Sir, Janan Ganesh refers to the relative political tranquility that has prevailed in Britain over the last years, even in the face of 21 percent unemployment among young people, and other hardships resulting from the current crisis/recession, “The British have met crisis with understatement”, November 19.

That is of course extremely valuable and commendable, as long as it is of course much more the result of stiff upper lips, than of a feeling of resignation or sheer apathy, especially in coming generations.

In June 2012 in an Op-Ed I wrote “The power of a nation, and the productivity of its economy, which so far has depended primarily on the quality of its employees may, in the future, also depend on the quality of its unemployed, at least in the sense of these not interrupting those working.”

Who suckered who is the wrong debate

Sir George Soros writing about “The worst market crisis in 60 years” January 23, is right to say that resulting political tensions…may disrupt the global economy and plunge the world into recession or worse. Unfortunately he then adds coal to that fire when he speaks with venom about how “Globalization allowed the US to suck up the savings of the rest of the world”, knowing perfectly well this was mostly because of the immense reserve accumulations of dollars voluntarily made by governments, mostly to keep exchange rates artificially low in order to, in Soros phraseology, suck up jobs. Who suckered who is not the debate the world now needs.

That the US should have ignored the financing offers they received from the world and behaved with more discipline not one doubts, but neither would then other countries have been able to strengthen so much so that they now can perhaps take over some of the pulling responsibilities of a bit tired US economic locomotive. How that can best be done is what we should be debating.

No Santa comes Christmas?

Sir Kenneth Rogoff with his “The Fed must not play Santa to the markets” December 18 tells us to be careful since besides recession inflation might be lurking around in the woods. Okay that sounds like a reasonable warning from a reasonable man; problem is what are we to do with it? Given that our current problems might very well be derived from the fact that the Fed dressed as Santa during the rest of the year does Rogoff mean that comes Christmas they should now dress in academic robes?

Let us also look at the quality of growth

Sir Martin Wolf in “Who will pick up the thread after the great unwinding” November 21, answers himself that question with a “the rest of the world” and we, praying, join the chorus.

Having said that and since Wolf juggles around with some percentages of growth, and views with some tremor the possibility of a “growth recession” in the US, I would also like to add that, sooner or later, we need also to start looking more in detail at the sustainability and the quality of growth.

I am spending this Thursday of Thanksgiving in New York and I have just been informed that in order for my wife and daughter to access the real bargains during Black Friday I need to go with them to the stores when they open…at 5AM in the morning. Since that cannot be a sign of good growth, if some growth recession could help me from having to go shopping at 4 am next year, well then bring it on.