Banks, except for limited liquidity purposes, should not be dabbling in sovereign bonds

Sir, Reza Moghadam vice-chairman for sovereigns and official institutions at Morgan Stanley, in order to “provide more stimulus to slower-growing economies” proposes that “ECB should lengthen the maturity profile of the bonds it holds of slower-growing economies [as] Other things being equal, a flatter yield curve is more stimulative, as it encourages investment, and, by raising the price of long-dated bonds, strengthens the capital position of banks that hold them.” “A new twist in the ECB’s reinvestment policy”, September 13.

That reads as Moghadam hopes that ECB, indirectly, in a veiled way, helps to capitalize banks (and his department shine). It should not do so.

In my mind, if we want the real economy to stand a chance of sturdy and sustainable growth, banks should instead, little by little, be made to reduce the financing of public debt, most specially of its own sovereign, that to which they have been guided by very statist very low capital requirements. 

As fast as possible, banks should be allowed to hold the same capital when lending to entrepreneurs and small and medium businesses, as they are required to hold against sovereigns, residential mortgages and AAA rated securities. Only that way do the banks stand a chance to allocate credit efficiently to the real economy. 

In 2004, coming from a developing country, in a letter published by FT I asked: “How many Basel propositions will take before regulators 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.” That clearly applies now also to developed nations.

PS. Sovereign bonds, if so safe, at interest rates not subsidized by regulations, should primarily be available for pension funds and insurance companies.

@PerKurowski

Those in 1989 so illusioned with the fall of the Berlin wall, never saw the Basel Accord that had hit the West 1988

Sir, Edward Luce writes: “We returned to England in 1989, hungover, each carrying a small chunk of the Berlin wall…We were infected with optimism.” “When west isn’t the best” Life & Arts, May 6.

And now, soon thirty years later Luce is so disappointed with what has happened thereafter, that he even writes such nonsense as “Others… in Caracas… share Russia’s hostility to western notions of progress”. Mr. Luce, dare go to the street of Venezuela and see for yourself how more than 80 percent of that country is risking their lives on the streets, fighting to maintain liberal values you hold, all in order to demolish a Havana-Beijing-Moscow-Teheran wall built by thugs, and which has destroyed a beautiful nation.

Luce ends with: “The west’s crisis was not invented in 2016. Nor will it vanish in 2017. It is structural and likely to persist. Those who gloss over this are doing liberal democracy no favours”; and that’s having already stated: “The self-belief of western elites saps their ability to grasp the scale of the threat.”

Sir, let us put the house in order. Luce writes: “The year 1215, the year of the Magna Carta, is today seen as the “year zero” of liberal democracy… By limiting the power of the king, the Magna Carta set a precedent for what would later be known as “no taxation without representation.”

Limiting the power of the king? In 1988, one year before Luce chipped away at the Berlin wall, the Basel Committee for Banking Supervision managed to get the Basel Accord agreed… and that accord, for the purpose of the capital requirements for banks, risk weighted the king, the sovereign, with 0% and its subjects, the citizens with 100%. From that moment on the statists’ wet dreams were realized and, amazingly, the western elite said nothing about this rape of the Magna Carta.

But Basel’s bank regulations did not only favor the king, it also introduced a risk aversion that had nothing with that “God make us daring!” attitude that made the west great.

That also realized the wet dreams of bankers, namely that of leveraging the most with what was perceived as safe, so as to be able to earn the highest risk adjusted returns on equity on what was perceived as safe, so as not having to lend the credit umbrella to risky SMEs and entrepreneurs.

Of course the west, with banks no longer financing the riskier future but only refinancing the safer present and past, and the sovereign, could, after that, only go in one direction, namely down, down and down.

Add to that the complications created by robots and automation. Those, on top of having to create jobs, now also require us to create decent and worthy unemployments.

The challenges for the west loom immense. To face these requires a neo Magna Carta that probably has to include something about a universal basic income, and of course getting rid of that insane mindset that came up with current bank regulations. That because, as Einstein said: “No problem can be solved from the same level of consciousness that created it”.

@PerKurowski