Creditworthiness should be grounded on what’s worthy of credit.

Sir, Martin Wolf writes “The vicious circle in which low creditworthiness begets unaffordable spreads, which beget debt crises and even lower creditworthiness.” “The threat of a lost decade in development”, Jan 11, 2023

NO! That vicious circle begins with too high decreed government creditworthiness. 

November 2004, the Financial Times published a letter in which I asked “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?”

Sincerely, anyone lending money to a developing country that has adopted Basel Committees’ bank regulations, based on that its bureaucrats know better what to do with that credit they’re not personally responsible for than e.g., its small businesses and entrepreneurs, deserves losing money.

When participating in the Sustainable Debt Levels (SDL) debate my opinion was always: “There cannot be a road more conducive to debt turning unsustainable, than to award credits just because they are sustainable.”

And what is development much about? The willingness to take risks. Where does Mr. Wolf thinks the western world would be with the current risk weighted bank capital requirements? In Nirvana or still among the emerging developing nations?

Friedrich List wrote that free trade was the means through which an already industrialized country “kicks away the ladder by which it has climbed up, in order to deprive others of the means of climbing up after it.” If we were to paraphrase List, if the high-income countries want to help, don’t kick away that ladder of risk taking that made them high-income.

1987, in reference to that credit risk aversion coming out of the Basel Committee for Banking Supervision, I ended my first Op-Ed ever with:

“If we insist on maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.”

Sir, I feel that paragraph being just as valid as then… and much worse, not only to developing nations.

PS. At the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, this is the document I presented:

My first Op-Ed: http://subprimeregulations.blogspot.com/1997/06/puritanism-in-banking.html

My letter in FT: https://teawithft.blogspot.com/2004/11/basel-is-just-mutual-admiration-club.html

The “Parable of talents” is currently quite inapplicable to any wealth tax.

Sir, I refer to “Why the toughest capitalists should root for a wealth tax” Martin Sandbu, FT, May 10.

Much of the current wealth is the direct result of huge liquidity injections, and which are distorted by risk weighted bank capital requirements that, among other, so much favors the debts of the government over debts to the citizens… all as if bureaucrats/politicians know better what to do with credit for which repayment they are not personally responsible for, than e.g., small businesses and entrepreneurs.

To favor such wealth tax, besides removing such distortions, I would also like to know what assets, and to whom, the wealthy should sell in order to raise the money to pay such taxes… and what would be the resulting overall productivity of such resource transfer. I believe a full review of the current productivity of all government spending is long overdue.

So, in this respect, taxing wealth with its revenues seemingly not being sufficiently productive, an understatement, sort of reminds me of a Harry Belafonte & Odetta song titled A hole in the Bucket

Sandbu also writes that “a net wealth tax…is the tax version of the New Testament’s parable of the talents” I’m not at all sure that’s currently really so.

I extract the following from Matthew 25: 24-27: 24 “Master,’ 25 I was afraid and went out and hid your gold in the ground. 26 “His master replied, ‘You wicked, lazy servant! So, you knew that I harvest where I have not sown and gather where I have not scattered seed? 27 Well then, you should have put my money on deposit with the bankers, so that when I returned, I would have received it back with interest.”

First, we now have regulators who, with bank capital requirements, tell banks that when they scatter and sow, they should be risk averse, guarding it all in safe gold, e.g., loans to governments and residential mortgages; staying away from what’s risky, e.g., entrepreneurs and small businesses.

Second, to top that up, with QEs central banks are injecting money thereby keeping interest rates ultra-low.

So, are we allowing bankers to exploit their talents? No! 

Will that produce good interest rates for the depositors? No! 

And if inflation takes off, will they receive their real money back? No!

Sir, with respect to risk taking, and even though I am a protestant, let me finally quote Pope John Paul II: Our hearts ring out with the words of Jesus when one day, after speaking to the crowds from Simon's boat, he invited the Apostle to "put out into the deep" for a catch: "Duc in altum" (Lk 5:4). Peter and his first companions trusted Christ's words, and cast the nets. "When they had done this, they caught a great number of fish" (Lk 5:6).

What America (and much of the rest of the world) needs is to free itself from the clutches of statist/communist bank regulators.

Sir, Martin Wolf, opines that “Joe Biden may be a last chance for US democracy” “Competency is Biden’s best strategy” January 27. 

Oh, if only all was that easy and in Biden’s hands. When compared to what some dark hands through bank regulations are doing to America (and to much of the world), both Donald Trump and Joe Biden are small fry.

Paul Volcker in his 2018 autography “Keeping at it” wrote: “The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages”. Volcker continued with “Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011”. That compared to all other that has been said about and quoted from Paul Volcker, has been totally ignored, or outright censored. 

But what does it really mean?

Lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs. 

Lower bank capital requirements for banks when financing the central government than when financing local governments, de facto implies federal bureaucrats know much better what to do with credit than local bureaucrats.

Lower bank capital requirements for banks when financing residential mortgages, de facto implies that those buying a house are more important for the economy than, e.g. small businesses and entrepreneurs.

Lower bank capital requirements for banks when financing the “safer” present than when financing the “riskier” future, de facto implies placing a reverse mortgage on the current economy and giving up on our grandchildren’s future.

Sir, I just ask, would America have even remotely become the great land it is, if that kind of risk adverse bank regulations had welcomed the immigrants when arriving at Ellis Island / Liberty Island... to the Home of the Brave?

Wolf also uses new-confirmed Treasury secretary, Janet Yellen, to endorse what he himself have argued so many times namely: “With interest rates at historic lows, the smartest thing we can do is act big” Again, where would those historic low rated be without the Fed’s QEs and without the regulatory favors mentioned? Really? Historic lows or historical communist subsidies?

PS. Not the first time (nor probably the last) I've written to Martin Wolf on this.

@PerKurowski

Risk taking is the oxygen of all development. God make us daring

Sir, I refer to Arvind Subramanian’s “Developing economies must not succumb to export pessimism” October 16.

In October 2007 at the High-level Dialogue on Financing for Developing at the United Nations, New York I presented a document titled “Are the Basel Bank Regulations Good for Development?”

Let me quote just two paragraphs from it:

“Credits deemed to have a low default or collection risk will intrinsically always have the advantage of being better perceived and therefore being charged lower interest rates, precisely because they are lower risk. But, the minimum capital requirements of the Basel regulations, by additionally rewarding "low risk" with the cost saving benefits resulting from lower capital requirements, are unduly leveraging the attractiveness of "low risk" when compared to "higher risk" financing.

It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope, since risk taking is an integral part of its economic vitality, but it is a real tragedy when developing countries copycats that and falls into the trap of calling it quits.”

Risk taking is the oxygen of all development. God make us daring!

The risk weighted bank capital requirements represent a monstrous “intellectual dereliction of duty” and so is the continued silence on it by “Western economists, academics and policy advisors”

@PerKurowski

If Brexit goes hand in hand with a Baselexit, Britain will at least do better than now.

Sir, Martin Wolf titles, [and I add], “Irresponsible promises will hit brutal economic reality" November 15.

Just like the irresponsible and populist promise of “We will make bank systems safer with our risk weighted bank capital requirements" and that is based on that what bankers perceive as risky is more dangerous than what they perceive as safe, brutally hits our real economies.

Wolf quotes the Institute for Fiscal Studies with, “over the last 11 years [before any Brexit], productivity — as measured by output per hour worked — has grown by just 2.9 per cent. That is about as much as it grew on average every 15 months in the preceding 40 years.”

And I ask, could that have something to do with that Basel II that introduced capital requirements that allowed banks to leverage their equity much more with the “safer” present than with the “riskier” future, for instance 62.5 times with what has an AAA to AA rating while only 12.5 times with a loan to an unrated entrepreneur? Of course it has. With it regulators gave banks the incentives to dangerously overpopulate safe havens, and to abandon their most vital social purpose, which is to allocate credit efficiently to the real economy.

So compared to the damage done by the Basel Committee for Banking Supervision any foreseen negative consequences of Brexit seem minuscule.

And with respect to obtaining financial resources for financing the investments in infrastructure that Wolf so much desires, and which would cause larger fiscal deficits he argues “a necessary condition would be the confidence of the world’s savers and investors in the good sense, self-discipline and realism of British policymakers.”

Indeed, what if British policymakers stated. “We abandon the Basel Committee’s regulations. Not only are these with their 0% risk weight to the sovereign and 100% the citizens outright communistic, but these also introduced a risk aversion that truly shames all those British bankers who in past times daringly took risks and with it bettered Britain’s future”. 

Sir, I hold that would be a much-needed example for the whole world of good sense, self-discipline and realism. “A ship in harbor is safe, but that is not what ships are for.” John A. Shedd.

Sir, Wolf seemingly thinks that remaining in a EU in which its authorities assigned a 0% risk weight to all Eurozone’s sovereign debts, even though none of these can print Euros is better for Britain. As I see it, that is a reason for running away from it even more speedily.

PS. Should not bank supervisors be mostly concerned with bankers not perceiving the risks correctly? Of course! So, with the risk weighted capital requirements, what are they doing betting our bank system on that the bankers will perceive credit risks correctly?

@PerKurowski

The Basel Committee jammed banks’ gearboxes… not only in India

Amy Kazmin reporting on India quotes Rajeev Malik, founder of Singapore-based Macroshanti, in that “A well-oiled, well-functioning financial system is the gearbox of the economy”, “Financial system is ‘like a truck with a messed-up gearbox’” September 23.

The financial system’s gearbox got truly messed up when regulators decided that banks could leverage differently their capital based on perceived risk… more risk more capital, less risk less capital… as if what is perceived as risky is more dangerous to bank systems than what is perceived as safe.

And Kazmin writes: “The financial companies that had provided much of India’s credit growth in recent years are now struggling with access to funding themselves after the shocking collapse of AAA-rated infrastructure lender, IL&FS, last year.”

Could that have something to do with the fact that since 2004 Basel II regulations banks needed to hold only 1.6% in capital when human fallible credit rating agencies assigned an AAA to AA rating to a corporation?

And Kazmin writes: “With its own voracious appetite for funds to finance its fiscal deficit, New Delhi is now mopping up much of the country’s household savings through a clutch of small schemes such as post office savings that offer higher rates than commercial banks.”

Could that have something to do with the fact that since 1988 Basel I regulations, banks need to no capital at all against loans to the government of India… but 8% when lending to Indian entrepreneurs.

Sir, risk taking is the oxygen of any development so, with such a dysfunctional gearbox, how is India going to make it? None of the richer countries would ever have developed the same with Basel Committee’s bank regulations… and all their bank crises, those that always result from something safe turning risky, would have all been so much worse, as these failed exposures would have been held against especially little capital. 

Here is a document titled “Are the bank regulations coming from Basel good for development?” It was presented in October 2007 at the High-level Dialogue on Financing for Developing at the United Nations. It was also reproduced in 2008 in The Icfai University Journal of Banking Law. 

@PerKurowski

What keeps IMF and World Bank so silent on bank regulations that go against their respective mission?

Sir, you argue, “If the IMF and the World Bank were to disappear, the absence of their combination of expertise, credibility and cash would soon be painfully obvious.” “Bretton Woods twins need to keep adapting” July 18.

Absolutely but they would also be sorely missed as the right places for having serious discussions on many serious issues that can affect our economies. 

But in that respect both have also been somewhat amiss of their responsibilities. The Basel Committee’s credit risk weighted bank capital requirements, which so dangerously distort the allocation of bank credit, have not been sufficiently discussed.

The World Bank, as the world’s premier development bank, knows that risk taking is the oxygen of any development. With this in mind it should loudly oppose regulations that so much favors the safer present’s access to bank credit over that of the riskier future. Doing so dooms our economies to a more obese less muscular growth. 

And IMF should know that all that piece of regulation really guarantees, is especially large bank crises, caused by especially large exposures to something perceived or decreed as especially safe, and that turn out to be especially risky, while being held against especially little bank capital. 

Why the twins’ silence? Perhaps too much group think, perhaps too close relations with regulators, something that could make this topic uncomfortable to discuss. 

PS. My comments to the Financial Stability Board

With bank regulations biased against risk taking, the oxygen of development, emerging has been made so much more difficult for nations

Sir, I refer to Jonathan Wheatley’s report on emerging markets “Falling further behind” July 17. 

Banks used to apportion their credit between those perceived as risky, and those perceived as safe, based on their own portfolio considerations and risk adjusted interest rates. But that was before the Basel Committee’s risk weighted capital requirements.

Now banks apportion credit between those perceived as risky, and those perceived as safe, based on their own portfolio considerations, the risk adjusted interest rates, and the times bank equity can be leveraged with those risk adjusted interest rates, so as to be able to earn higher risk adjusted returns on equity.

That has leveraged whatever natural discrimination in access to bank credit there is in favor of the “safer present” against that of the riskier future. Since risk taking is the oxygen of any development, what might this have done to the emerging markets?

PS. Here is the document I presented in October 2007 at the High-level Dialogue on Financing for Developing at the United Nations, New York.

@PerKurowski

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

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

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

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

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

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

@PerKurowski

If China abandons the risk weighted bank capital requirements, and the West does not, the West is lost.

Sir, Martin Wolf with respect to China quotes premier Li Keqiang stating: “We will reform and refine monetary and credit supply mechanisms, and employ . . . a combination of quantitative and pricing approaches . . . to guide financial institutions in increasing credit supply and bringing down the cost of borrowing”… [and that he] stressed the need to “ease funding shortages faced by private enterprises”, “encourage private actors to engage in innovation” and “attract more private capital into projects in key areas”. “The Chinese economy is stabilising” April 3.

In his book Money: Whence it came, where it went” (1975), John Kenneth Galbraith speculates on the fact that one of the basic fundamentals of the accelerated growth experienced in the western and south-western parts of the United States during the past century was the existence of an aggressive banking sector working in a relatively unregulated environment. He wrote, “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

And that hits the nail. Risk taking is the oxygen of any development.

The current risk adverse risk weighted capital requirements for banks that assigns a risk weight of 0% to the Sovereign, 20% to any AAA rated corporation, 35% to residential mortgages and 100% to the unrated citizens, like those entrepreneurs on whom a nation’s strength depends on, is the perfect recipe for a secular stagnation.

God make us daring!

@PerKurowski

I hope David Malpass, nominated by USA, if confirmed as president of the world’s premier development bank, understands that risk-taking is the oxygen of all development.

Sir, Robert Zoellick writes: “If policymakers overlook the experience of developing countries during the crisis, they are less likely to consider emerging market dynamics, understand developing economies’ sources of resilience and appreciate vulnerabilities” “Who ever runs the World Bank needs a plan for emerging markets” February 6.

Of course no one should overlook experiences obtained during crises but, focusing excessively on these, puts a damper on the potential growth between the crises.

In his book “Money: Whence it came, where it went” (1975), John Kenneth Galbraith, referring to the accelerated growth experienced in the western and south-western parts of the United States during the 19thcentury, argued that it was the result of an aggressive banking sector working in a relatively unregulated environment. “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

For instance when banks are required to hold more capital when lending to their “risky” entrepreneurs, than when lending to their “safe” sovereign, as current Basel regulations mandate, that is bad enough in developed countries, but, in developing/emerging countries, it is absolute lunacy.

While an Executive Director in the World Bank 2002-2004, a time during which Basel I was discussed I did what I could to alert to the huge mistakes of its pillar, the risk weighted capital requirements for banks. Unfortunately I was not able to convey my warnings, and these were approved in June 2004.

I hope that David Malpass, now nominated by USA, if confirmed as the next president of the World Bank, fully understands the following:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements impede banks from taking efficiently the risks that are needed to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd.

Second, that what’s perceived ex ante as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large bank exposures to what is especially perceived (or decreed) as safe, against especially little bank capital.

God make us daring!

PS. Here is a brief summary of what I had to say on this issue before and during my term as an ED. It includes two letters published by FT

@PerKurowski

What I as a former Executive Director, pray that any new President of the World Bank understands

A letter to the Financial Times

Sir, I was an ED at WB from November 2002 until October 2004. During that time Basel II was being discussed. It was approved in June 2004. 

I was against the basic principles of these regulations that had begun with the Basel Accord of 1988, Basel I. That should be clear from Op-Eds I had published earlier, transcripts of my statements at the WB Board, and in the letters that I wrote and FT published during that time. Here is a brief summary of all that 

Since then I haven't changed my mind... that package of bank regulations is almost unimaginable bad.

I pray the next president of the world’s premier development bank, whoever he is, and wherever he comes from, at least, as a minimum minimorum, understands:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements, will distort against banks taking the risks that help to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.”, John A Shedd.

Second, that what’s perceived as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large exposures to what is especially perceived (or decreed) as safe, against especially little capital.

Sir, would you not agree that mine is a quite reasonable wish?

@PerKurowski

Bank regulators from developed countries kicked away the ladder of risk-taking for the developing ones

Sir, Mohamed El-Erian writes: “the global economy is losing momentum and the divergence between advanced economies is growing… the majority of developed economies are yet to adopt meaningful pro-growth measures”, “Faltering developed world economies raise the risks for equity investors” November 21

Sir, Friedrich List in “The National System of Political Economy” 1885[1]wrote that free trade was the means through which an already industrialized country “kicks away the ladder by which it has climbed up, in order to deprive others of the means of climbing up after it.” 

In a similar way I would argue that the Basel Committee, with its perceived credit risk weighted capital requirements for banks kicked away from the developing countries that ladder of risk-taking that had been the oxygen for helping to get the developed countries where they are.

In 2007 at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I introduced a document titled“Are the Basel bank regulations good for development?”

In it I tried to explain that prioritizing as it does bank lending to the safer present over that to the riskier future is not how a nation can develop.

Sadly, nothing came of it.

But worse, the fact that the developed countries also promote these regulations means they are now reversing their development; and they will also have to confront especially horrible crises… those caused by especially excessive bank exposures to what is ex ante especially perceived as safe, but that ex post turn out risky, against especially little bank capital.

PS. A statement in 2003 as an Executive Director at the World Bank: “Risk aversion comes at a cost - a cost that might be acceptable for developed and industrialized countries but that might be too high for poor and developing ones. In this respect the Bank has the responsibility of helping developing countries to strike the right balance between risks and growth possibilities…. In this respect let us not forget that the other side of the Basel [Committee’s regulatory risk weighted capital requirements] coin m . ight be many, many developing opportunities in credit foregone.”

PS. A 2019 letter to the Executive Directors and Staff of the International Monetary Fund.

God make us daring!

@PerKurowski

[1]List, F. 1885. The National System of Political Economy, translated by Sampson S. Lloyd from the original German published in 1841. London: Longmans, Green, and Company

Our bank regulators, just like "Sulley" Sullivan and Mike Wazowski, fear the wrong thing.

Sir, Martin Wolf, discussing US-China relation ends with, “Our enemy is not China. Have confidence in our values of freedom and democracy. Understand that it is on the creation of new ideas that we depend, not the protection of old ones. That in turn depends on freedom of inquiry and openness to the best talent from around the world. If western countries lose these, they will lose the future. As the greatest US president of the 20th century declared: “The only thing we have to fear is fear itself.” “America must reset its rhetoric on China’s rise” October 31.

Absolutely! But why then it is so hard to get Mr. Wolf to understand that current risk weighted capital requirements for banks, which so dangerously distorts the allocation of credit to the real economy, is nothing but an expression of fear… and to top it up a completely unfounded one. 

Just as "Sulley" Sullivan and Mike Wazowski in Monsters Inc. thought that children were toxic to them, the regulators are convinced that what’s perceived as risky is what’s dangerous to our bank system. Of course it is what’s perceived as safe that poses the real dangers.

Wolf asks, “What has been the most important event of 2018 so far?” He answers “arguably, it was the speech on US-China relations by Mike Pence, US vice-president, on October 4.”

I would hold that the most disastrous important event during the last three decades was the introduction, in 1988, with the Basel Accord, of these so utterly silly and naïve risk adverse regulations. That year the Western world said no ti the risk-taking that has been the oxygen of its development.

Sir, again, let me remind you that just for a starter, had no banks been allowed to leverage with assets over 60 times only because these were AAA rated, or limitless with loans to sovereigns like Greece and Italy, we would all be in a much different and surely better world.

When is Martin Wolf going to stop protecting old senseless fears?

God make us daring!

John Kenneth Galbraith would probably include Alan Greenspan among men of wisdom that missed the point.

Sir, Robert Gordon, reviewing Alan Greenspan’s and Adrian Wooldridge’s “Capitalism in America: A history” writes: “Three themes are highlighted — productivity as the measure of economic progress; the “Siamese twins of creation and destruction” as the sources of productivity growth; and the political reaction to the consequences of creative destruction.”, “After the gold rush”, October 20.

I have not read that book yet, I will; creative destruction plays absolutely an important role in the acceleration and sustainability of growth.

I do not know Adrian Woodridge, but, when it comes to the former Fed Chairman Alan Greenspan, I have an inkling that if John Kenneth Galbraith was still around, he would suggest Greenspan does not have all what it takes to write that book.

Let me explain that by quoting from Galbraith’s “Money: Whence it came where it went” 1975: “For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.”

Alan Greenspan clearly fits in with those “Men of economic wisdom” (of the East) who are distasted by unstable banking. To make banks stable, he supported risk-adverse risk weighted capital requirements, much lower for what’s perceived safe (the present) than for what’s perceived risky (the future). 

Sir, and if one is to tellthe real “full, epic story of America's evolution from a small patchwork of threadbare colonies to the most powerful engine of wealth and innovation the world has ever seen”; which is how this book is being promoted, one would need to begin with the willingness of its people to take risks.

What would have happened to America if banks with risk-weighted capital requirements had met its immigrants? Probably that imagined 1620 meeting in Davos about the future world, in which “one region goes unmentioned: North America. The region is nothing more than an empty space on the map” would not have found its way into this book.

The saddest part of all this is that our current generation of central bankers and regulators, like Alan Greenspan, those who prioritized bank stability over growth, as if these two aspects could be separated, anyhow did it totally wrong. With their risk weighted capital requirements, they only guarantee that banks will end up with especially big exposures, against what’s perceived as especially safe, against especially little capital; something which can only cause especially big crises, like that of 2007-08.

PS. Galbraith’s book also explained that, de-facto, regulators had also decreed inequality

PS. Gordon writes about “millions of immigrants being drawn in from Europe as the ever-expanding railroads, enjoying massive government subsidies in the form of free land, in turn subsidised the new arrivals so that they would populate the west.”.  I am not sure that amounted to “massive government subsidies”. If not zero, most of it must have been extremely low valued land. It was those migrants who with their sweat, inventiveness and willingness to take risks built up the value of that land.

PS. Gordon complains the book has “only a page or two reckons the human cost of underpaid labourers, including the consequences of malnutrition [and on] labour unrest”. That reads just like political correctness’ flag waving; and belief in that if only the task of development was assigned to the right kind of central planners, his kind, it would be achieved in a nice and fair way, with no sufferings and no inequality.

PS. In Venezuela, during a conference, 1978, forty years ago, John Kenneth Galbraith autographed “Money” for me. Mine was the only one he signed explaining he did so because it was a pocket book and much underlined  J His book inspired the first Op-Ed that I wrote, more than twenty years ago.

@PerKurowski

The priority of those who committed the mistakes that caused the financial crisis has been the cover up, not the corrections

Sir, Gillian Tett, similarly to like Martin Wolf wrote a couple of days ago, expresses surprise and concerns for the fact that so many things that were supposed to be corrected or at least bettered after the financial crisis seem worse today. She lists the level of debt and leverage, the market share of TBTF banks, the size of the shadow banks, and that no few bankers directly related to the crisis have been jailed. “Surprising outcomes of the financial crash”, September 7.

But how can one be surprised by so few corrections and betterments when those supposed to correct and better it remain being those who committed the mistakes, and have not been held accountable one iota for their mistakes? 

But how can one be surprised by so few corrections and betterments when in the aftermath of the crisis so many truths were classified as those that shall not be named, and consequently arduously silenced, like for instance:

Lack of regulations: Wrong! Total missregulation. Regulators for their risk weighted capital requirements for banks used the perceived risk of banks assets, those that bankers were already clearing for, and not the risk that bankers would perceive and manage the risks wrongly. They seemingly never heard of conditional probabilities.

Excessive risk taking: Wrong! It was the regulators excessive risk aversion that gave banks incentive to build up excessive exposure to what was perceived safe. Like allowing banks to leverage assets a mind-blowing 62.5 times only because some human fallible credit rating agencies had assigned it an AAA to AA rating.

Greece did it: Wrong! EU authorities did Greece in, when assigning a 0% risk weight to its debt. Is the statism implied in assigning a 0% risk weigh to the sovereign and one of 100% to the citizens discussed? No! There are too many interested in benefitting from crony statism for that.

Sir, Ms. Tett ends with “predictions are best presented with a dash of humility — and the knowledge that what does not happen can sometimes be even more significant than what actually does.”

Indeed but since “that what does not happen” could be much a result from a lack of questioning, to understand it could also require loads of humility from journalists. Capisce FT? 

@PerKurowski

EU needs to find a president of the European Central Bank quite different from Mario Draghi… whatever it takes

Sir, you opine, “The most worthwhile tribute that European governments can make Mario Draghi, the president of the European Central Bank, is to find a successor who most closely replicates his attributes and has the best chance of continuing his success. There are few harder acts to follow in global policymaking than his. He has helped rewrite the central banking handbook, shepherding the euro through an existential threat from the sovereign debt crisis and the danger of a deflationary recession. “Next ECB chief should be in the Draghi mould” August 30. 

I disagree and believe that FT, at some point down the road, will have to eat up these words of praise for Draghi; who alsopreviously served as the Chairman of the Financial Stability Board from 2009 to 2011 and Governor of the Bank of Italy from 2005 to 2011.

Draghi, as a regulator, with the risk weighted capital requirements for banks was partt of the team that introduced a risk-aversion, which ignored all the valuable services banks provided, when acting as the societies’ designated risk-takers.

Draghi, as a regulator, ignoring conditional probabilities, supported risk weighted capital requirements for banks based on the perceived risk of assets and not based on how banks could manage those assets dependent on their own perceptions of risk. That distorted the allocation of credit, causing among other banks to fall over a precipice when chasing those AAA to AA rated securities they were allowed to leverage a mind-blowing 62.5 times with.

Draghi, as a regulator, was, is, a statist of first degree, for agreeing with risk weights of 0% for the sovereign and 100% for the citizen.

Draghi, as a European central banker, who must have known that the challenges the euro posed had not been taken care of, irresponsibly agreed when Greece was assigned a 0% risk weight, which caused its current tragedy.

What Draghi did in ECB, was just to act as the principal member of that kicking team that kicked the crisis-can down the road, willfully ignoring the fact that European grandchildren will suffer when that can begins to roll back on them.

Sir, in summary, the next ECB chief should know about the importance of risk taking, about conditional probabilities, should not be a statist, and should be able to refuse punishing a EU nation, like Greece, for the mistakes of EU authorities. 

So, whatever it takes, he should be very different from Draghi. I would hold that EU’s own chances of survival depends much on that. 

@PerKurowski

Sweden sadly forgot risk-taking was the oxygen of its development.

Sir, Martin Sandbu, when discussing Scandinavian countries, the Nordic mixed model begins with: “Ten years ago, the global crisis laid bare the failures of financial capitalism.” “Nordic lessons for today’s socialists” August 29

That most still believe the crisis “laid bare the failures of financial capitalism”, is just the result of what seems to be one of the greatest cover up stories in mankind, promoted by those who want the regulatory mistake of the risk weighted capital requirements for banks to remain forever as something that shall not be named.

And it has absolutely to do with the subject discussed here because, one of the reason little Sweden, the Nordic country I best know, became such huge success, was the willingness of many Swedes to take extraordinary risks. In the Swedish Church psalm book we find a psalm that begs, “God make us daring”.

I find it outright shameful that a Swede, Stefan Ingves, could chair the Basel Committee and not enlighten his colleagues on risk-taking being the oxygen of development.

Of course, to top it up, that the risk weights are foolishly based on the risk of assets per se, and not on the risks of how bankers perceive and manage the assets, namely the conditional probabilities, makes it all so much worse. We will not have explosions fueled by risk-taking but much worse explosions fueled by excessive risk-aversion 

Today Swedish banks, as most of the world, are on route to build up extremely dangerous exposures to what is perceived as safe, like to sovereigns, residential mortgages or any other concocted security that manages to get hold of an AAA rating. 

Sir, today Swedes risk end up in their “safe” houses from which they have extracted all equity, and without the jobs needed to service their mortgages or to pay the utilities. Sad!

@PerKurowski

Even after the crisis there has been no change in who are represented when deciding on bank regulations.

Sir, Sarah O’Connor writes: “If we want groups to make fair decisions, our best shot is to make the groups representative of the people who are subject to those decisions.” Hear hear!, “Diversity coaching from the Olympic dressage event” August 22.

In the matter of bank regulations, where were all those who perceived as risky by the banks, like entrepreneurs, suffered the Mark Twain realities of bankers lending you the umbrella when the sun shines and wanting it back if it looks like it could rain?

Had they been present perhaps regulators would have understood the concept of conditional probabilities, and therefore had realized that assets perceived by bankers as risky become safer, not riskier; while assets perceived by bankers as safe become riskier, not safer.

Can you imagine how much tears, sufferings and lost opportunities that would have saved the world, primarily our young?

The saddest part of the story is that even after the crisis should have evidenced to all the regulators had no idea of what they were doing, there has been no changes at all in who are being represented when analysis and decisions are taken, so they still keep seeing and considering the risks in the same or quite similar way, the bankers are perceiving the risks. 

How good it would have in the Basel Committee some representation of the young who know that risk taking is the oxygen for the development they need, and that the older do not have the right to “safely” extract all equity from the current economies.

@PerKurowski

Bank regulators violated the holy intergenerational social contract that Edmund Burke spoke about.

Sir, Philip Stephens writes: “Nostalgia has always had its place in politics. Respect for tradition is at the heart of Burkean conservatism. The deep irony about the now mythologised postwar decades, however, is that these were times when citizens looked unambiguously to the future.” “Nostalgia has stolen the future” July 27.

I am from 1950, and I do feel nostalgic whenever I think of all those savvy credit officers who were now substituted by equity minimization financial engineers.

When regulators, in order to make our banking system safe, ludicrously decided that what was perceived as risky was more dangerous to bank systems than what was perceived as safe, they distorted the allocation of bank credit in favor of the “safer” present so much that they de facto sacrificed that risk taking the “riskier” future needs. That is an egregious violation of that holy intergenerational social contract that Edmund Burke spoke about.

Those regulators are autocratic besserwisser populists who concoct their ideas, in a groupthink séance, in their Basel Committee mutual admiration club!

“Populists”? “We will safeguard your bank systems with our risk weighted capital requirements for banks” As if they knew what those risks were. Sir, can you think of something more populist than that?

@PerKurowski