How can Eurozone’s sovereigns’ debts, not denominated in their own national/printable fiat currency, be considered 100% safe?

Sir, Laurence Fletcher in Tail Risk of August 28, writes: “Yields on German Bunds and other major government bonds have been moving steadily lower, as prices rise. That has burnished their credentials… as a safe haven in uncertain times”

Sir, how can Eurozone’s sovereigns’ debts, which are not denominated in their own national/printable fiat currency, be considered safe? 

The reasons the interest rates on that debt is low is the direct result of regulatory statism.

Risk weighted bank capital requirements that much favor the access to bank credit of the sovereign over that of the citizens.

That the European Commission assigned a Sovereign Debt Privilege of a 0% risk weight to all Eurozone sovereigns, even when these de facto do not take on debt in a national printable currency.

That ECB’s, with its QEs, have bought up huge amounts of Eurozone sovereign debts.

What would the interest rates on eurozone sovereign debt be if banks had to hold as much capital against their debts, than what they need to hold against European entrepreneurs?

@PerKurowski

Feeble regulatory minds, seeing risks in what’s perceived risky, doom our banks to die trapped in the last safe-haven

Sir, Robin Wigglesworth quotes Paul Singer of Elliott Management with: “Given groupthink and the determination of policymakers to do ‘whatever it takes’ to prevent the next market ‘crash’, the low-volatility levitation magic act of stocks and bonds will exist until it does not. And then all hell will break loose” “Calm waters raise fears of a leverage comeback” June 7.

Indeed, only an intellectual degenerating incestuous groupthink can explain current bank regulators fixation with what is perceived risky. Their risk weighted capital requirements are based on the perceptions of risk being correct, while as all logic screams for, these should be based on the possibilities of these perceptions being incorrect. The riskier something is perceived, the safer it is; and the safer something is perceived, the more dangerous it can become. “May God defend me from my friends, I can defend myself from my enemies”, Voltaire dixit.

Those regulations, by favoring so much what is perceived, (concocted) or decreed as safe, like assigning a 0% risk weight to sovereigns, cause sovereigns to be getting too much credit on too easy terms; and that banks could end up holding only sovereigns on their balance sheets. When that happens who is going to be able to kick the can forward to another safe-haven (gold?), sovereigns or their central bank agents?

Sir, our whole banking system is set on a path that with signs of “follow this safe route”, leads directly to a precipice.

You insist in keeping mum about that. There will come a day you, or at least your children, will deeply regret that.

When will regulators stop feeding us fake tranquilizers?

“Risk weighting” So we are to suppose risks have been duly considered?

“Living wills” So we are supposed to think that trustees are capable to enforce these?

“Stress tests” Tests that ignore the stress to the real economy because of what should be on bank’s balance sheets but is not, like “risky” loans to SMEs?

Dodd-Frank’s “Orderly Liquidation Authority” “Orderly”? No Sir, when the last safe haven runs out of oxygen, I assure you it is going to be anything but orderly… then all hell will really break loose.

Per Kurowski

@PerKurowski

Might economists have spent too much time at their desks and too little on Main-Street to understand risks?

Sir, Tim Harford discusses how economists could have presented their case against Brexit more effectively. In doing so Harford refers to Dan Kahan, a Yale law professor, when arguing that “Giving people evidence that threatens deep beliefs is often counterproductive, because we start with our emotions and trim the facts to fit them”, “Economists face up to Brexit fail” July 9.

Interesting because that is very similar to what I have been asking myself:

How can I get my fellows economist colleagues to understand that, in banking, what is ex-post more dangerous, is what has ex ante been perceived as safe, and which therefore signifies that bank regulators are basically 180 degrees off the charts with their current risks weighted capital requirements for banks?

And how can I get my fellows economist colleagues to understand that if you allow banks to earn higher expected risk adjusted returns on equity when lending to what is perceived as safe than when lending to what is perceived risky, the banks will dangerously overpopulate the safe havens and, equally dangerously, under-explore the risky bays our real economy needs to be explored in order to move forward, so as to not stall and fall?

What deep beliefs do economists hold that block them from understanding risks? Might it only be they have spent too much time at their desks and too little on main street?

@PerKurowski ©

When compared to how risk adverse bank regulation help overcrowd safe havens, Brexit is but a small blip.

Sir, Gillian Tett writes about how the negative-yielding sovereign bond pile keeps swelling and argues that as a consequence “asset managers and insurance companies will see their earnings slide unless they start buying more risky debt — which will bring dangers of its own” “Now watch the shift in interest rates” July 1.

It is not “risky debt” that poses the largest risks, it is excessive exposures to what is perceived as safe that does. Just as Voltaire meant with his “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]”

The current risk weighted capital requirements for banks, which drive banks out of what is ex ante perceived as risky, and into what is ex ante perceived as safe, only guarantees the safe havens to, ex post, become dangerously overpopulated; and the risky bays, equally dangerous to the real economy, to remain unexplored.

How many letters have I not written to FT over the years explaining that?

@PerKurowski ©

If regulators artificially favor the access to bank credit of “the safe” “the safe” will turn risky, more sooner than later.

Sir, Gillian Tett writes “post-crisis regulatory reforms have forced financial institutions to load up with “safe” assets, too, to be used as collateral for deals… The net result is a dire squeeze on safe assets” “What pawnbrokers can teach central banks” April 29.

That is correct but, what about pre-crisis regulations? These allowed banks to leverage much more their equity with “safe” assets; and thereby earn much higher expected risk adjusted returns on equity with “safe” assets than with “risky” assets; and which therefore caused banks to lend too load up on “safe” assets, something that can be very risky.

So if you do not allow markets to allocate credit unencumbered by regulations, but favor the banks to lend to the safe, “the safe” havens are doomed to turned into dangerously overpopulated havens, sooner or later. And from what Ms Tett writes it seems that the “sooner” applies.

@PerKurowski ©

What pay rules can we impose on regulators who insist on distorting the allocation of credit to the real economy?

Sir, you write “US federal regulators this week proposed new pay rules intended to limit excessive risk-taking” “Investment banks can endure tougher times” April 23.

Time again to understand what “excessive risk-taking” is being referred to.

One thing is the risk of dangerously large exposures to what is perceived, decreed or concocted as safe, and which allow for very small capital requirements. Those were the risks that caused the 2007-08 crisis, AAA rated securities, residential housing finance and sovereigns like Greece.

Another thing is the risk of the risky, like SMEs and entrepreneurs. These risks, because they generate higher capital requirements, are risks not sufficiently taken, and the economy suffers from that.

Do regulators really know what “excessive risk-taking they want to limit? I seriously doubt it. The “more-risk less-pay” and the “less-risk more-pay” is just the typical kind of intervention that brings on unexpected consequences.

More-risk more-capital less-pay. Less-risk less-capital more-pay. We will all end up suffocating in some over-populated safe haven!

It is obvious, at least to me, that the greatest current source of risk to the banking system, and to the economy, are the risk weighted capital requirements for banks, which so distorts the allocation of credit. Are there some pay rules on regulators we could apply?

@PerKurowski ©

The most important investors for the economy of tomorrow, are those who act on its margin, like SMEs and entrepreneurs.

Sir, Martin Wolf writes: “Because corporations are responsible for such a large share of investment, they are also, in aggregate, the largest users of available savings”. And he lashes out at corporations for not doing enough investments. “The corporate contribution to the savings glut” November 18.

Yes, corporations are the largest users of available savings, but that does not mean they are those who move the investments on the margin. Those most important, on the margin investors, are those tough risky risk-takers we need to get going when the going gets tough. And those are the ones who have their fair access to bank credit blocked by the credit risk weighted capital requirements for banks… since banks will always preferentially access to assets against which it has to put the least of its own equity for… especially in times of scarce regulatory bank capital.

I know that Martin Wolf does not understand or does not want to admit the distortions in the allocation of bank credit that credit-risk weighting regulation does, but that does not make it one iota less distortive.

PS. Amazing. Martin Wolf even suggests we should think about taxing retained earnings to force corporations to invest and not of getting rid of those regulations that block the access to bank credit for investments. Much of that corporate cash is in banks and in the unproductive "safe havens"

@PerKurowski ©

Banks are dangerously overpopulating the traditional save havens of widows, orphans and pension funds.

Sir, Attracta Mooney quotes Pascal Blanqué, deputy chief executive of Amundi, stating: “QE has proved a mixed blessing. It prevented a 1929-style depression after the collapse of Lehman Brothers in 2008. But it has also delivered unintended consequences for longterm investors. The challenge for policymakers is to address them.” “QE ‘acted like an opaque tax’ on pension funds” November 2.

Again someone is speaking about unintended consequences, instead of referring to what obviously should have been expected consequences.

With QEs injecting liquidity into safe investments; with bank regulations awarding huge incentives through the capital requirements for banks to finance what is safe; with bank regulations awarding additional huge incentives through liquidity requirements for banks to hold what is safe, and with sovereign debt having been decreed as ultra-safe and assigned a zero risk weight, there can be no doubt that the financial safe havens of the world are bound to become dangerously overpopulated. Where is a widow or an orphan to take refuge nowadays… in Argentinian railroad projects?

@PerKurowski ©

To manage risks our bankers are always better free, in God’s hands, than in hands of some hubristic sophisticated besserwissers

Sir, Martin Wolf writes: “Market liquidity is likely to disappear when one needs it most. Building our hopes on its durability is risky. That is correct, but when he argues: “the absence of regulation exacerbated the liquidity boom and subsequent bust”, his implicit message is… that regulators should do something about it. “Beware the liquidity delusion” October 7.

I on the other hand have always worried about that bank regulators, when they act on their own perceptions of credit and liquidity risk, in any sort of complex form, introduce distortions, systemic risks, which can make everything so much worse. 

What feeds our credulity to believe something is more safe just because we perceive that something to be more safe? Is it not so that the safer an asset is perceived, the more we can run the risk of everyone demanding it excessively, and thereby make that asset really risky?

What feeds our credulity to believe something is more liquid just because we perceive that something to be more liquid? Is it not so that the more liquid an asset is perceived, the more we can run the risk of everyone demanding it excessively, and thereby at one point make that asset absolutely illiquid… at absolutely the worst moment?

Wolf suggests: “It would be better if investors appreciated the risks of a freeze in market liquidity in riskier financial assets”. Yes, but one must also argue the importance for regulators to appreciate the risks of a freeze in market liquidity for “safe” financial assets. A freeze of those assets would obviously hurt much more. (Like what happened with the AAA rated securities collateralized with mortgages to the subprime sector)

Wolf suggests: “markets characterized more by longer-term commitments, and less by hopes of finding ‘greater fools’ willing to buy at all times, might be better for most of us. This will not be true for all assets — notably government bonds. But it will be true for many private instruments”. Indeed, more long-term commitments could be good, but why does Martin Wolf believe that government bonds could never become a dangerously overpopulated safe haven in which we all got stuck gasping for oxygen? Is it ideology?

Of course dangers surround us, our financial markets and our banks, all the times; many more than credit and lack of liquidity risks. To manage those risks I am convinced we are better of being free, in God’s hands, than in the hands of some sophisticated besserwissers suffering immense hubris. But that’s just me.

Does this mean I don’t want any regulations? Of course not! But keeping those simple, and essentially considering the unexpected instead of the expected, would go a long way. The expected always finds a way to take care of itself… though I must admit that sometimes that takes strangers going strange ways and using strange tools.

@PerKurowski ©  J

Has Europe fallen into the hands of a Chauncey Gardiner like figure?

Sir, I refer to Joel Lewin’s “European QE redraws junk bond frontier” April 14.

Were the implications not so tragic one could have joked about Europe having fallen into the hands of a Chauncey Gardiner like figure; the gardener elevated to Economic-Guru in Jerzy Kosinski’s “Being There”.

ECB’s/Mario Draghi’s seems not to understand the dangers of flooding the markets with QE liquidity, while the channels for that to flow by means of bank credit to where it is most needed, like to SMEs, are clogged. Firmly clogged by senseless credit-risk-weighted equity requirements for banks.

The overflow of liquidity, into more risky bonds, creates clearly serious risks for individual investors. But, for the economy at large, much worse is the dangerous overpopulation of the “safe-havens”; and the even more dangerous refusal to explore the risky bays, where there is a chance to find what could feed the future.

At least a normal gardener would now you need to water the plants, but not too much.

@PerKurowski

Any regulator that would call what is currently happening an unexpected consequence is clearly not fit to regulate.

Sir, I refer to Stephen Foley’s “BlackRock chief warns ripple effect of strong dollar threatens US growth” April 7.

It states that Larry Fink, CEO of BlackRock “highlights the risk that monetary easing has inflated asset bubbles as investors such as pension funds searching for yield in a low interest environment are pushed into riskier classes”. And it quotes Mr Fink with: “This mix of growing assets and shrinking yields is creating a dangerous imbalance”. I am left wondering whether Mr. Fink really knows what is going on.

Does he know that one reason for why pension funds “are pushed into riskier classes”, is that they are pushed out from the perceived safe havens by bankers pushed into safer classes by their regulators with their silly and dangerous credit risk weighted equity requirements for banks? And that is just going to get worse the tighter bank equity gets to be, and when insurance companies also regulated with Solvency II in a similar way?

Indeed, “monetary policy seem insufficiently attuned to the conundrums their actions are creating for investors” But regulators are equally attuned to the conundrums their actions are creating for the fair access to bank credit of “the risky”, like for all the SMEs and entrepreneurs we need to get going when the going is tough.

And regulators please do not call all this an unexpected consequence. If you do it just evidences even more that you are definitely not fit to regulate.

@PerKurowski

At the end of the day, with these bank regulations, even Germans will suffer the same or worse tragedy than the Greeks

Sir, bank regulators, the Basel Committee and the Financial Stability Board, fully endorsed by ECB, allowed all European banks to hold much less equity when lending to the government of Greece or to the banks in Greece, than when lending to Greek small businesses or entrepreneurs. That led to the excessive indebtedness of Greece and Greek banks, and caused too little bank credit to be awarded to those who could best drive the real economic growth in Greece.

And because of that Greek and Cypriot citizens will now have to suffer deflation or inflation (same shit), having to pay higher taxes, and perhaps even be the subject to capital controls as those Hans-Werner Sinn proposes in “Impose capital controls in Greece or repeat the costly mistake of Cyprus” February 17.

If I was a Greek citizen I would of course lodge my “J’accuse the ECB of high treason or imbecility” … but I would also warn my fellow Europeans, that, with these lousy and discriminatory regulations, they are all no doubt heading the same way to a similar tragedy... including the Germans.

In fact Germany, which shares with the US the largest possibility of becoming the last safe haven in town, might end up with its sovereign safe haven as the one most dangerously overpopulated.

What flight to quality? To dangerously overpopulated safe havens?

Jonathan Wheatley quotes Stuart Oakley, global head of EM foreign exchange trading at Nomura: “The point of QE is to inflate the real economy. But instead of driving growth it is creating asset bubbles”, “Emerging bubble”, February 16.

How could it be otherwise? The growth of the real economy depends much on allowing the real economies’ “risky” risk-takers, like SMEs and entrepreneurs, to do their job. And that has been blocked by capital requirements for banks that force equity scarce banks to hold more equity when lending to the “risky” than when lending to the “safe”.

And the article speaks about “Flight to quality”. What quality? The usually safe havens, those usually used by widows and orphans, are now being dangerously overpopulated by banks following the instructions imparted by regulators.

Wheatley also refers to “while the yield on the benchmark US Treasury bond has fallen from 6 per cent in 2000 to less than 2 per cent today, the returns sought by many US public pension funds have barely changed at about 8 per cent.” And Sir, if you consider that “less than 2 per cent”, in light of a by the Fed declared inflation target of 2 per cent, then buying those bonds would amount to a sort of prepaid pre-accepted haircut, which could be something prohibited for pension funds to do.

Europe is caught in a bank regulation trap set up by the Basel Committee and the Financial Stability Board

Sir, I refer to Ralph Atkins’ and Michael Mackenzie’s “Caught in a debt trap” January 29.

They write “Crisis-fighting actions by central banks have not only sent yields on government debt to lows not previously seen in recent history but many of them are negative. Across much of Europe, investors are actually paying for the privilege of lending money to governments in some cases.”

Indeed, but little can be concluded from that without referencing the regulatory trap in which banks have been caught.

In Europe banks represent by far the most important part of how liquidity is transmitted to the real economy. And Europe’s equity scarce banks, because of tightening equity requirements, for instance by means of the leverage ratio, while the risk-weighted equity requirements are still in place, are being forced to take cover, more and more, in what regulators have denominated to be safe havens… with deposits at central banks and debts of “infallible sovereigns” being the safest of those.

And so banks, at gunpoint, are forced to accept negative rates on their deposits with central banks or incest in low yielding sovereigns. And so what we see is not a market expressing its free will, but a market that is competing with banks subject to distorting regulations.

If Mario Draghi had not been the Chairman of the Financial Stability Board, and might therefore be too reluctant to concede how disastrous current bank regulations are, then perhaps the recent stress tests of European banks would have included an analysis of what was not on their balance sheets. And that would have pointed squarely to the lack of lending to the “risky” small businesses and entrepreneurs… those tough risk-takers Europe needs to get going now when the going is tough.

I still believe bank regulators did it all because of sheer group-think derived stupidity but, if not, they should be… well, I leave that to you.

ECB has no moral right to inject any liquidity in Europe, if it is only going to increase the distortions

Sir, I refer to Peter Spiegel’s “ECB defends crisis bond-buying in high-level legal hearing” October 15.

The credit-risk weighted capital (equity) requirements for banks distort any liquidity injection of the ECB in Europe. And so, while the ECB seem to not care one iota about that, they have not earned the moral right to buy bonds, most especially sovereign or other “absolutely safe” bonds that are anyhow so much favored by these regulations.

No ECB, instead of buying “absolutely safe” bonds should allow bank to in relative terms hold less capital against exposures to the “risky”… since there is where new liquidity could do the most good.

Europe… it is dangerous to overpopulate safe havens, and equally dangerous to under explore the more risky but perhaps much more productive bays.

Nothing good can result from a credit boom that avoids risky bays and dangerously overcrowds safe havens.

Sir, I refer to Martin Wolf’s “We are trapped in a cycle of credit booms” of October 8.

If each credit boom that later results to be unsustainable, and creates sufferings, is the result of markets believing, rightly or wrongly, they found something new and profitable worthy to risk their money on, lets call those possibly productive credit boom, then at least I would not complain. That is the result of a world that wants and dares to move forward, so as not to stall and fall.

But the latest credit boom, at least the one financed by banks, has nothing of such a productive credit boom. Since regulators allowed banks to earn much higher risk adjusted returns on equity on what is perceived as safe than on what is perceived as “risky”, it is exclusively a run-to-safety boom. And, of course, nothing good can come out of not exploring risky new bays but only dangerously overcrowding safe havens.

PS. Let me remind you of that secular stagnation, deflation, mediocre economy and similar creatures, are direct descendants of silly risk aversion.

QEs were wasted by dangerously overcrowding safe-havens while leaving risky but valuable bays unexplored

Sir, Martin Wolf explores if quantitative easing “An unconventional tool” has worked” October 6. He fends off much criticism of QE with arguments that could make a savvy defense lawyer blush, namely that it should not be accused of weaknesses and risks that it shares with other monetary policies.

My continuous criticism of QE, and that Wolf ignores, is that if QE is done in conjunction with the current credit risk-weighted capital requirements for banks, it will help the safe havens to become dangerously overcrowded, while “the risky” bays, those the economy most need, will remain totally and even more dangerously unexplored.

Wolf mentions the possibility of a “helicopter drop”, retrospectively, but, for that to happen, the QE liquidity would have to be soaked up and returned without the existence of the silly guidance mechanism used by bank regulators.

There can’t be any sturdy economic growth in sending our banks to occupy the terrain where orphans, widows and pension funds used to roam, in order to wait for money to drop on them.

Which also leaves us with one question about the civilian casualties of QE. Where do risk-adverse savers save when what is “most-safe”, pays interest rates below the risk-free rate, as a result of sovereign debt being subsidized by the fact that banks do not have to hold much or any capital against it?

Investors driven out of safe investments by bank regulations and QEs, are they yield-hungry or just yield-starved?

Sir, Tracy Alloway and Michael MacKensie write that “Sales of US corporate bonds reflect a worrying lack of ratings differentiation” and they title that “Yield-hungry investors overlook credit risk” September 19.

All Fed’s QE’s, as well as the risk-weighted capital requirements for banks, as well as the upcoming liquidity requirements for banks, as well as much other risk-adverse regulations, only end up crowding out normal investors from what is deemed as “absolutely safe”, that which used to be said belonged to widows and orphans. 

And in that respect I wonder if “yield-hungry” is really the correct description of investors who seem more to have been yield-starved by official governments actions.

But also, let us not forget to ask ourselves… when can the extremely safe havens become so extremely dangerous crowded, so that suddenly the risky waters outside are actually safer?

And, is it not sad to read that increased corporate leverage is not resulting from increased real economic activity but only from “the combination of share buybacks dividend increases and M&A activities? I bet some years from now some authorities will once again try to explain that to us as just the result of “unintended consequences”… let us not be fooled by that… at least to me they are guilty, until they proved beyond any reasonable doubt it was not their intentions… or they plead insanity :-).

Because of regulatory subsidies, banks are taking over what remains of safe havens, leaving other in the arms of risk.

Sir, John Plender writes about an “extraordinary demand for unsafe assets”, “Time is running out for the central bank riggers”, April 9.

It is not that it explains it all but, besides the quantitative easing that Plender mentions, much is caused by the fact that banks have been subsidized, by means of extraordinarily low capital requirements, to populate (overpopulate - dangerously) the ever scarcer safe havens.

Where pension funds and small time investors in need of maximum security used to go, that’s where the banks are today. What are now us normal risk avoiders to do? How can you compete with banks for a real positive rate, in what seems safe, if banks are allowed to leverage 20-30 times when going there?

Damn you, you so risk adverse, baby boomer bank regulators

Sir, Satyajit Das, states clearly the fact that, if things go on the same, “Over time, financing will become concentrated in official agencies, the ECB and national governments or central banks. Risks will shift from the peripheral countries to the core of the eurozone, especially Germany and France”, “Debt crisis has left German economy vulnerable” November 5.

Of course, how could it be otherwise, with bank capital requirements that so much favor banks going to the “safe harbors”?

Unfortunately, what Satyajit Das, and the Financial Times, do not get is that the greatest cost of it all, for the eurozone and for the whole Western world, is all that adventurous, quite risky, but potentially extremely productive bays that were not explored, only because of such regulations, produced by such risk adverse bank regulators... and who only concern themselves with banks and not one iota with the real economy.