The privileged subsidizing of sovereign debt that apparently shall not be named

Sir, let us suppose that as credit risks, banks perceived Martin Wolf and me as equally risky or equally safe. We would then, for the same amount of borrowings, be charged the same risk adjusted interest rate.

But then suppose that for whatever strange reason, regulators allowed banks to leverage much more with loans to me than with loans to Martin Wolf, and so banks would therefore obtain higher returns on equity when lending to me than when lending to Martin Wolf.

And also suppose that for some even stranger reason, Bank of England would buy my loans from the banks, but not those loans given to Martin Wolf.

Clearly the result would be that I would be able to borrow much more and at much cheaper rates from banks than what Martin Wolf could.

Would Martin Wolf in such a case opine that the higher interest rates he had to pay was the result of the market?

I ask this because Martin Wolf frequently makes reference to the very low rates that many sovereigns have to pay, and holds they should take advantage of it by borrowing as much as they can, in order to invest for instance in infrastructure.

And Martin Wolf seemingly refuses to consider those “very low rates” a consequence of regulatory favors of sovereign debts and QE purchases of it.

That distorts the allocation of credit in such a way that, de facto, regulators and central banks believe bureaucrats / politicians know better what to do with credit they’re not personally responsible for than for instance entrepreneurs. 

In the best case I would call that crony statism, in the worst outright communism. 

One day future historians will recount, and Paris’ Musée de L’Homme exhibit: “1988 Basel I: When Regulators introduced Financial Communism”

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

If only inflation had also measured the price of houses and not just rentals, a lot of problems could have been avoided.

Sir, Jamie Smyth reports on “the end of a five-year expansion, which saw house prices in Australia’s biggest city rise 70 per cent and household debt surge above 120 per cent of gross domestic product — one of the highest levels in the developed world.” “End of Australia housing boom sparks fear of disorderly crash” September 7.

In the housing sector inflation is solely measured based on the rentals, which surely lag house prices. In 2006, in a letter that FT published, I asked: “Who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”

If inflation had also partly measured house prices, it would not have shown such low figures, and then inflation targeting central banker would have had to tighten monetary conditions, and bank regulators, their credit and capital requirements conditions. 

How central bankers can just turn a blind eye to it could have something to do with that a great majority, or perhaps all of them, are house owners, and therefore only see good in the value of their houses going up. Now when things are getting out of hands, let’s make sure they are not given any preferences, so that they can learn the lesson in ways that helps them to remember it.

The political convenience of helping house buyers with preferential access to credit only results in house prices going up, and thereby having to provide even more preferential credit. Of course Saul Eslake of University of Tasmania is right arguing, “a gradual deflation of property prices, though painful for some, will do more social good than harm.”

Sir, as I have often written to you, much better that helping young buyers with affordable credits to buy houses is helping them to afford houses, c'est pas la même chose.

A house used to be a home; now authorities made these homes and investment assets. The journey back to being solely homes will hurt, many, a lot. The alternative of inflating ourselves out of the mess could be even worse.

PS. And when push comes to shove are not shares just another type of assets to be included in inflation calculations?

@PerKurowski

If building houses where they are actually wanted, which we should, what do we do with the unwanted lot?

Sir, Robin Harding holds “What should not be in doubt is that supply limits are the single biggest problem with housing… reform the planning rules, and let people build homes where they are actually wanted.” “Planning rules are driving the housing crisis” August 15.

I agree, of course we should build houses where they are actually wanted, but the challenge of what to then do with the unwanted lot, poses major difficulties. 

It is not solely “the role of falling interest rates in pushing up house prices” that has caused houses to become financial assets. Much other preferential treatment is given to the financing of house purchases. Among other, because the financing of houses is perceived so safe by regulators, banks need to hold much less capital against residential mortgages than, for instance, against loans to entrepreneurs. (Those entrepreneurs who could create the jobs that would allow for mortgages to be duly serviced and utilities to be paid).

All that has helped house prices to shoot up and become the most important financial asset for way too many, whether for the owners, or for the banks or other who have helped many owners to extract whatever equity he had in his house.

As a consequence our society, our economies, have become mindboggling exposed to the need of keeping up house prices, while simultaneously needing house prices to become more affordable. To navigate well those waters will not be an easy task. 

Looking at some demographic realities perhaps what needs to be done is not to build more houses, but to build more senior citizens residences, thereby freeing many upstairs so that children could move up from the basements or other young move in.

@PerKurowski

Dodd-Frank rollback on mortgages heralds even higher house prices and even less financing of job creation.

Sir, I refer to Barney Jopson’s and Ben McLannahan’s “Dodd-Frank rollback heralds mortgage push” May 17.

Because of the risk weighted capital requirements bank credit is geared to finance what is perceived or decreed as presently safe, like houses and the government, and to stay away from financing the “riskier” future, like entrepreneurs.

Of course I am glad for “a bill aimed at giving small banks relief from post-crisis reforms that had driven them out of parts of the market” so to give these some “more opportunity [to] offer mortgages to folks we know”

I just wish the roll back had meant the risk-weighted capital, so to incentivize small and big banks to give more credit opportunities to entrepreneurs, in order to give “folks we know” more chances of finding the jobs that will help them to service their mortgages and utilities.

PS. One very needed research is on how much of current house prices are the result of regulatory or other subsidies to the financing of mortgages. When now buying a house, how much might we currently have to finance because of the financing of all other purchased houses? 

@PerKurowski

Central bankers have surely favored government borrowings… and the costs will be horrendous.

Sir, Desmond King reviews and discusses Paul Tucker’s “Unelected Power”, which asks:“To whom are central bankers responsible? How is oversight of their discretionary authority monitored in a democracy? Can central banks remain legitimate as they choose financial winners and losers?”

The starting point for Tucker’s questions seems to be when, in September 2008, “Citizens and bankers sat transfixed as Lehman Brothers collapsed, rattling equity and credit markets”.

Wrong! Not that I had any idea of it back then but the genesis of the problems herein referred to seem to me be in 1988 when bank regulators came up with the incredibly hubristic concept of risk weighted capital requirements for banks, as if anyone could measure ex ante the risks that would explode ex post.

From a cv. on the web I see that Paul Tucker worked in 1987 in “the Banking Supervision Division; as part of the 4 person team negotiating the Basle International Capital Convergence Agreement; and assistant to chair of Basle Supervisors Committee”

So when King writes that “Tucker argues that the “most compelling reason” for [central bank independence] is to “enable governments to save paying an inflation risk premium on their debt”, I must ask: “Really Mr. Tucker, does that require risk weighing the sovereigns with 0% while assigning the citizens 100%?” 

That regulatory subsidy causes, sooner or later, governments to take will be getting up too much debt, that which can only be repaid by the printing machine… meaning inflation… meaning tragedies. 

I have not seen anyone holding Sir Paul Tucker accountable.

PS. I dare Paul Tucker, the current chair of the Systemic Risk Council, to give a coherent explanation for why banks should hold more capital against what’s made innocous by being perceived risky, than against what’s perceived safe and therefore carries more dangerous tail risks? The distortion that produces in the allocation of bank credit constitutes, as I see it, a huge systemic risk.

@PerKurowski

How long are you going to allow statist bank regulators subsidize the public sector borrowings with a zero percent risk weighting?

Sir I refer to Kate Allen’s and Chris Giles write “The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year” “Rising tide of sovereign debt to hit rich nation budgets, warns OECD” February 23.

I do not know what the total OECD debt was in 1988, but the US public debt was t$2.6 trillion when then statist bank regulators assigned it a 0% risk weight. At end of 2017, much because of the subsidies imbedded in that 0% weight, US’s public debt was now US$20.2 trillion. It still has a 0% risk weight.

In 2004, in a letter you published I wrote: We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.

I came then from a development country, Venezuela, but that comment clearly applies to the OECD too.

In December 2009, on the eve of the new decade, FT also published a letter in which I wrote: “My worst nightmare is that unmanageable Versailles-type public debts will become fertile ground for those monsters that thrive on hardships”. That nightmare is only getting worse and worse.

@PerKurowski

What if all finance help provided house buyers in Canada, which increases demand, reflects 30% of current house prices?

Sir, with respect to Ben McLannahan’s extensive report on the Canadian house market February 9, “Canada’s home loans crisis”, I would just want to ask:

What if regulatory and all other support developed in order to provide house buyers in Canada easier financing, something that obviously increases the demand for houses, translates into being, let us say, 30% of the current house prices in Canada?

Who has that then benefitted, buyers or vendors?

Does this mean Canada must now help with new financing to house buyers only in order to pay for old financing help?

How could something like that not end in a disaster?

As I see it much more important than helping our young to affordable houses, is helping our young to afford houses. Ce n'est pas la même chose!

http://perkurowski.blogspot.com/2018/01/many-of-our-young-will-be-without-jobs.html

@PerKurowski

Martin Wolf, public borrowings are being subsidized by bank regulations

Sir, Martin Wolf discussing the UK government’s private finance initiative (PFI) and costs of capital writes: “A sophisticated counter-argument is that government borrowing enjoys an implicit subsidy from taxpayers. That represents an unpriced insurance contract… This subsidy makes government funding look cheaper. But this is an illusion. “Public-private partnerships have to change to be effective” January 26.

Illusion? Does Martin Wolf really think that if banks had to hold the same capital against sovereign debt, than for instance against loans to entrepreneurs, the interest rate on public debt would remain the same?

Or, in a similar vein, does Martin Wolf really think that if banks had to hold the same capital when financing houses, than for instance when lending to entrepreneurs, the price of houses would not be negatively affected?

Mr. Wolf: Do you really think it is the risks for the banking system that are being weighted in those capital requirements? If so, I am sorry to have to break the bad news to you, again, for the umpteenth time. The risks that are being weighted for are the risks of the assets per se, which is why regulator want banks to hold more capital against what is ex ante perceived as risky than against what is perceived as safe.

Which explains how they could assign a risk weight of only 20%, to what rated AAA could pose a terrible threat to our banks, and a whopping 150%, to what rated below BB- bankers won’t touch with a ten feet pole.

John Kenneth Galbraith, in his “Money: Whence it came, where it went” (1975) wrote: “What people do not understand, they generally think important. This adds to the prestige and pleasure of the participants” … and yes, Sir, “risk weighted capital requirements” sounds indeed so delightfully sophisticated… almost as much as “derivatives”.

@PerKurowski

The risk weighted capital requirements for banks close way too many development doors.

Sir, Martin Wolf referring to the World Bank’s latest Global Economic Prospects writes: “A slowdown in the potential rate of growth is affecting many developing countries. This is not only the result of demographic change, but also of a weakening in productivity growth. They need to tackle this urgently.” “Recovery is a chance for the emerging world” January 17.

Sir, during my two years as an Executive Director of the World Bank, and with respect to the Basel Committees’ bank regulations, I continuously argued for the need to maintain “an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth.”

At the High level Dialogue on Financing for developing I presented a document titled “Are Basel bank regulations good for development?” which I answered with a clear NO!

In 2009 Martin Wolf, in his Economic Forum allowed me to publish “Free us from the imprudent risk aversion and give us some prudent risk-taking”.

And in hundreds sites more, among other with over 2600 letters to FT, I have argued about the horrible mistakes of the risk weighted capital requirements for banks present, not just for developing countries but also for developed ones.

The distortion these produce in the allocation of bank credit in favor or what is perceived or decreed as safe, sovereigns, AAA rated and mortgages, has impeded millions of “risky” entrepreneurs around the world to gain access to bank credit, thereby hindering much new productivity.

And those regulations will not bring us stability, much the contrary.

So the first thing to do to allow what Wolf wants, “greater entrepreneurial effort, more competition, higher investment and faster improvements in productivity”, is the elimination of risk weighted capital requirements for banks.” But Martin Wolf will most probably not agree, because how could he?

Sir, and as I have told you umpteenth times those regulations will not bring us stability, much the contrary.

PS. Look for instance at houses. What would the price of a house be if there was no financing available to purchase these? Of the current price of houses how much is represented by the intrinsic value of the house, and how much is a reflection of all one-way-or-another subsidized financing allocated to that sector? The sad truth is that our society has ended up financing the financing of houses. When all that low risk weighted mortgaging comes home to roost in a subprime unproductive economy, it will be hellish.

@PerKurowski

It’s not the role of regulators and central banks to help governments fund their operations, behind the back of citizens

Sir, Kate Allen writes that “euro-area financial institutions” have reduced their holdings of public debt “17 per cent in the past two years [but] the ECB made nearly €1.5tn of cumulative net purchases of eurozone public sector bonds through its quantitative easing programme — effectively replacing the purchasing role that banks had played. “Post-crisis reforms force European governments to curtail size of debt sales” January 5.

It all forms part of the same statist subsidizing of public debt. 

What would sovereign rates be if banks had to hold the same capital against sovereign debt than against loans to citizens; and if ECB had not purchased “eurozone public sector bonds through its quantitative easing programme”? The answer would have to be rates much higher, which would send quite different risk-free-rate signals.

In 1988, with Basel Accord, statist regulators, with their 0% risk weighted bank capital requirements, began subsidizing immensely government borrowings. When the 2007/08 crisis came along, central banks, perhaps in order to hide own their regulatory failures, with their quantitative easing purchases generated, wittingly or not, new sovereign debt subsidies.

This has dramatically changed the economical relations between governments and private sectors. It amounts to statist hanky-panky behind the backs of citizens. Since besides needing servicing it consumes, for nothing really special, sovereign indebtedness space that could be urgently needed tomorrow, it might become deemed as high treason by future generations. Where this is going to end is anyone’s guess, but it sure won’t be pretty.

@PerKurowski

More food for the hungry and less food for the less hungry sounds logical and decent, that is unless the hungry are obese and the less hungry anorexic.

Sir, Martin Wolf writes: “More equity capital would make banks less fragile.” “Fix the roof while the sun is shining” December 6.

That is only true as long as we get rid of the distorting risk weighted capital requirements for banks. Though “more risk more capital - less risk less capital” sounds logical, that is unless “The Safe” get too much credit and “The Risky” too little. If that happens, both banks and the economy will end up more fragile.

Wolf writes: “The world economy is enjoying a synchronised recovery. But it will prove unsustainable if investment does not pick up, especially in high-income economies. Debt mountains also threaten the recovery’s sustainability”. Let me comment on that this way:

First: “a synchronised recovery” is a way to generous description of what is mostly a QE high that has just helped kick the crisis can down the road.

Second: The investments most lacking in the “unsustainable if investment does not pick up” part, is that of entrepreneurs and SMEs, those which have seen their access to bank credit curtailed by regulators. It is high time we leave the safer but riskier present and get back to the riskier but safer future.

Third: The “Debt mountains [that] threaten” are either those for which regulators allow banks to hold much less capital against, like sovereigns and residential mortgages; or those consumer credits at high interest rates that dangerously anticipate consumption and leaves us open to future problems.

Sir, let me again make a comment on Wolf’s recurrent recommendation of “Public investment to improve infrastructure”. He usually argues this in order to take advantage of the very low interest rates. That ignores that those low rates are not real rates but regulatory subsidized rates. If banks had to hold the same capital against loans to sovereign than against loans to citizens, and if also central banks refrained from additional QEs, I guarantee that the interest rates on public debt would be much higher.

Besides, given the fast technological advances, we do not even know what infrastructure will be so much needed in the future so as to be able to repay the loans, instead of just burdening more our grandchildren.

@PerKurowski

Professor Summers. Keeping mum on how sovereign public borrowings are currently subsidized is cheating on the future

Sir, Lawrence Summers writes: “Borrowing to pay for tax cuts is a way of deferring, not avoiding, pain. Ultimately the power of compound interest makes even larger tax increases or spending cuts necessary. But in the meantime debt-financed tax cuts raise the trade deficit, and reduce investment thereby cheating the future.” “A Republican tax plan that would help the rich and harm growth” November 6.

Sir, Prof Summers is entirely correct in that “Borrowing to pay for tax cuts is a way of deferring, not avoiding, pain”. But, one major reason for why such borrowing can occur is that it is currently contracted at artificially low rates.

With the regulatory subsidy imbedded in the capital requirements for banks’ 0% risk weighting of sovereign debt; and with the stimuli provided by the Fed with its low interest policy and huge quantitative easing programs, America’s current government’s borrowing costs do not reflect the real undistorted rates.

Without these non-transparent help from their statist colleagues, there is no doubt the interest rates would be higher, the current fiscal deficit higher, and the adjustments needed much clearer.

Sir, since Professor Summers has been consistently ignoring this, he is willing or unwittingly helping to cheat the future too.

@PerKurowski

The interest rates on public debt are distorted by QEs and bank regulations. Seemingly no one dares to research that

Sir, Baroness Ros Altmann, when commenting on Martin Wolf’s (“Capitalism and democracy are the odd couple” of September 20, writes:

“Global central banks have artificially distorted capital markets for several years, by creating vast amounts of new money to buy sovereign debt. The supposedly “risk-free” interest rate, on which much of the system depends, has been undermined (and she concludes)… it is important to consider the democratic dangers to capitalism which prolonged QE may pose. ” “Disguised fiscal measures play role in democratic recession” September 22.

She is absolutely correct, and I have over the years written for instance Martin Wolf numerous letters on it.

But there is also the regulatory distortions provoked by the risk weighted capital requirements for banks introduced in 1988 with Basel I, and which assigned a 0% risk weight to sovereigns.

That meant at that time, and well into current Basel III times, that banks needed to hold little or no capital when lending to sovereigns; meaning banks were authorized to leverage immensely when lending to sovereigns; meaning banks could earn fabulous risk adjusted returns on equity when lending to sovereigns; meaning banks would lend too much and at too low rates to sovereigns.

So, when to QEs we add this through-the-back-door regulatory subsidies to government borrowings from banks (and now with Solvency II extended to insurance companies) it is absolutely clear we have no idea what the real cost of public debt is; and so we are all flying blind… and government bureaucrats having much easier access to bank credit than SMEs or entrepreneurs.

Last November, during IMF’s Annual Research Conference, I got at long last one of the major experts, in this case Olivier Blanchard, to agree with me in that “lets make sure that we have removed all the distortions which we can, which affect r (rates), so we have the right r”.

Sir, as of this moment that was the last time I have heard about it.

Why is there no response? Perhaps the answer is found in Upton Sinclair’s “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

PS Here is the link to my own response to that particular article of Martin Wolf

@PerKurowski

Why is it so hard to understand Basel I’s 1988 statist regulatory distortion of credit in favor of sovereigns?

Sir, I have written 59 letters to John Plender over the years, mostly about the distortions in the allocation of bank credit to the real economy the risk weighted capital requirements cause. These letters, as well as other 2500 to you, denouncing the serious and fundamental flaws with the Basel Committee’s risk weighted capital requirements, have been basically ignored… let us say censored.

For instance in May 2016 I wrote: “I am amazed John Plender leaves out the fact that… courtesy of the Basel Committee, banks currently need to hold especially little capital against that public debt... for which “the issue of solvency would resurface”

And all that because unilaterally the regulators, in 1988, with the Basel Accord suddenly decided that sovereigns posed no credit risk, and no one protested the statism that was thereby de facto introduced.

To workout our banks out of such bind, will take huge amounts of fresh bank capital and very specialized knowledge, or intuition on how to go about it, without disastrously affecting the bank lending to the rest of the economy.”

And in November 2004 FT did publish one letter in which I wrote: “I also wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

Now, John Plender writes: “The risk-weighted Basel capital adequacy regime, despite post-crisis tweaking, is fundamentally flawed. Sovereign debt enjoys excessively favourable treatment so eurozone banks stuff their balance sheets with the IOUs of seriously over-indebted governments”, “Lessons from the credit crunch” July 7.

Sir, when in a year or two I might publish a book on my impossibilities to communicate with FT, you or someone in FT will have some explanations to do.

In this world of fake news, shutting up someone who might be denouncing something that could be akin to financial sector terrorism is just as bad.

@PerKurowski

All sovereign need to detox from what artificially favors their borrowings. The withdrawal symptoms will be horrendous

Sir, I refer to your “France’s detox from debt is Macron’s hardest task” July 10.

That is the task of most sovereigns in the world. If you start adding up what tax exemptions’, Basel’s 0% risk weights, and the purchase of sovereign debt through QEs’ really means in terms of subsidizing government borrowing, there is no doubt we are heading for all sovereigns having to, sooner or later, to detox from excessive debt. As the addiction to plenty and cheap debt is very much addictive to governments, I assure you the withdrawal symptoms will be horrendous. But, if they don’t withdraw from this addiction all be so much worse.

A world that in this way de-facto presupposes government bureaucrats can use bank credit for which they are not personally responsible better than the private sector is a world destined to failure.

What do current banks regulations mean? That banks can multiply many times more any net risk adjusted margin when lending to a sovereign than when lending to the private sector… and almost no one seems to find nothing wrong with that.

As the access to plentiful and cheap borrowings is very much addictive to governments, I assure you that the withdrawal symptoms will be horrendous. But, if they don’t withdraw from it we all will be so much worse.

Sir, your silence on this regulatory failure is mindboggling. Or you are statist beyond help, or dumb, or you just don’t have it in you to recognize a mistake.

@PerKurowski

Children, no matter what the redistributors promise, you cannot redistribute the future before it’s been created

Sir, Martin Wolf writes: “A case can be made for borrowing for high-quality investment, especially when real interest rates are so low… But the increased spending needs to be paid for by effective and efficient taxation… What is needed is honesty: the country can choose to raise spending. But, if it wants to run a sound fiscal policy, this will mean substantially higher taxes” “Austerity is dead. Long live austerity” June 16

Honesty? Are the low real interest rates on sovereign debt for true, or are these not much a function, an illusion, caused by the regulatory subsidies to sovereigns? Does a 0% risk weight for the sovereign, and a 100% for unrated citizens, which is what the Basel Committee’s standardized risk weights establish, really mean nothing when it comes to allocating bank credit to the real economy?

Yes, it would clearly have been better to launch different “high-quality” public investment programs, than that dumb kicking the crisis can down the road program financed with Tarps, QEs and what have you.

But, just like saying “risk-weighted” does not mean it has really been risk weighted, saying “high-quality” does not signify for one moment that it will be of “high-quality”. In fact, all around the world, what we continuously see is a reduction in the capacity of governments to deliver high-quality investments. Could that be because of their 0% risk weight, they are now less forced to do so?

Wolf also writes: “a quarter of Labour’s promised increase in spending goes to eliminate student debt, while leaving universities far worse off. This is an irresponsible and regressive benefit in favour of future winners.” Here again remember, mentioning “future winners”, does not guarantee one iota the students will be the future winners.

You young, please, don’t listen to siren songs. The future, no matter what the redistribution profiteers promise you, cannot be redistributed before it’s been created.

PS. Students, If you want universities to better help you be future winners, pay them 50% of what they actually charge you, with some basis points in you future earnings.

@PerKurowski

Martin Wolf, to keep the welfare state alive, before considering taxes, look at what real economy you need for that.

Sir, Martin Wolf asks: “Will the UK public sector be able to provide the benefits the public expects in return for the taxes it is willing to pay? The answer to that question seems to be “no”. If so, will the promise to provide some universal services be abandoned? Will taxes be raised? Or will debt be allowed to grow until it has to stop?” Wolf answers: “With current commitments, [fiscal] revenue must rise relative to GDP… The alternative is to abandon pillars of the welfare state.” “It is time to talk about raising taxes” May 19.

That starts from the wrong end. The real question should be what future economy do we need so that it will allow fiscal revenues or other means by which not having to abandon the pillars of the welfare state? The answer to that question might be increasing taxes as Wolf recommends but it could also require many other means, not necessarily including extreme ones like to “choose a collapse in life expectancy”

For many decades I have argued the best and most sustainable pension/health plan to be that of having children who love you and are working in a healthy and functioning economy.

I have been blessed with loving children, thank God, but I do fret about the future economy, as there is no way on earth for it to be either healthy or functionable with regulators distorting the allocation of bank credit, with their insane risk weighted capital requirements.

Since 1988, with Basel I, that set the risk weight of the sovereign at 0% and the citizens at 100%, public indebtedness has been artificially subsidized.

Unless that distortion is eliminated it will guarantee to deliver unsustainable public debt levels and an unhealthy economy. That is because whether the statists like it or not, reality is that government bureaucrats do not know how to use bank credit more productively than the private sector’s SMEs and entrepreneurs.

Having allowed the banks to run up such huge exposures to what is perceived as safe, the past and the present, while refraining from financing the riskier future, will cost our aging society much, because frankly, why should our children and grandchildren ignore that regulatory discrimination against them.

If we do not rectify, there will come a day where the young will show the elderly the finger… pointing at the closest “ättestupa”

PS. My decades long insecurities on the debate about social security

PS. Of course immigration and emigration could also help.

PS. A 2022 letter in Washington Post: “Before the debt ceiling is lifted, Congress must dare to at least pose a question.”

@PerKurowski

When “Eurozone sovereigns rush to lock in rates”… whom are they locking out?

Sir, I refer to Thomas Hale’s “Eurozone sovereigns rush to lock in rates” March 20.

It reads like the sovereigns were totally disconnected from their subjects. Like if they are able to lock in low rates, this would not be paid by, for instance, those pension funds that will earn less?

And if sovereigns have some inside information that rates will shoot up, and still sells a long-term bond to a citizen (a bank or an insurance company) is that not stealing? Would a citizen not be fined and sent to jail if he did something like that?

Bank regulators decided for instance that banks and insurance companies need to hold less capital when lending to sovereigns than when lending to citizens. That of course leads to sovereigns being able to borrow at lower rates than what would have been the case in the absence of such regulatory favor. And who pays for that regulatory subsidy? The “risky” SMEs and entrepreneurs pay for it; by means of less and more expensive access to bank credit. 

Sir there is such an amazing disconnect between the sovereigns and its subjects. It is as if the sovereigns have totally forgotten that their future is absolutely dependent on the future of its subjects. Or is it that current technocrats are just too statists or too dumb to understand what they are doing.

It does not help of course when influential papers like the Financial Times refuses to ask the questions that should be asked… like these:

@PerKurowski

Dominic Rossi: Populist bank regulation “strongmen” have promoted the state apparatus ever since 1988’s Basel Accord

Dominic Rossi writes: “The twin freedoms of capital and labour movement are fading, secular relics from a passing liberal age… The tendency of “strongmen” to use the state apparatus to conjure up growth will set our new course. The tedium of recent years, slow but steady growth, looks set to be dislodged by the seductive alchemy of a fiscally induced boom-bust cycle beloved by populists” “Dr Doom awaits seat at table as president-elect enjoys a free lunch” November 24.

Sir, I am sorry, we are already there. The Basel Committee for Banking Supervision’s technocrat strongmen, in 1988 decided that for the purpose of capital requirements for banks, the risk weight of the sovereign was 0% and that of We the People 100%. Could there be a more devious way of favoring the growth of a “state apparatus”?

Where would the rates on US Treasuries, those that usually serves as a proxy of the risk free interest rate be without this enormous regulatory subsidy? 

And that subsidy does not come free. Since decreed, it has been paid by millions of SMEs and entrepreneurs not getting access to bank credit on real undistorted market terms.

Rossi writes: “The repatriation of offshore US corporate balance sheets will help finance the good times” Yes and no! It might help finance good times for government if it causes more fiscal income, but let us not forget that those balance sheets might already be fully invested in US assets.

Rossi ends in: “Populism and strong currencies are rarely seen together for long.” Indeed it will, sooner or later, guarantee the dangerously overpopulation of what is decreed, perceived or concocted as safe havens… and when that happens everything will come tumbling down 

@PerKurowski