Animal spirits yes, but of lions, hyenas or pussycats? Do we have irrational exuberance, or rational fright?

Sir, John Authers commenting on how the Dow Jones Industrial Average can top the 20,000 mark for the first time writes: “Animal spirits are back. The enthusiasm is palpable, and is on a scale unseen since the height of the tech boom”, “Echoes of exuberance as the Dow stirs animal spirits” December 17.

Authers, with “markets… were in a very different state” would seem to agree with that we are not talking of the spirits of the same animals. The tech boom had lions with great illusion and too much optimism and bravery pursuing a brand new future. The current boom, resulting from low interests, QEs and excessive public debts everywhere, seems more one of pussycats taking refuge in whatever is offered. Of course, as always, hyenas are present in order to feast on the many cadavers any heightened volatility causes.

What brought all this on? Sir, as you know I think, but you do clearly not want the rest of the world to think, that this is the natural result of regulators taming, or castrating, the animal spirits of banks. That they did with their capital requirements based on ex-ante perceived risks, precisely those risks that were often already being cleared for too much by the ex-ante-risk-adverse bankers Mark Twain referred to.

Authers now writes: “Trump’s deregulatory agenda could delight markets.”

That’s a new view I very much welcome. Over the last decades, public opinion has almost exclusively been fed the notion that all of its troubles were only the result of financial deregulation.

The problem though is that Trump, even though he himself has been a bank borrower, does not really understand that without removing the odious regulatory discriminations against the “risky”, like SMEs and entrepreneurs like Trump, his stimulus plans, that which includes tax cuts, has not a fair chance to work.

@PerKurowski

Because of distortive bank regulations, current tax cuts will deliver much less growth than what could be expected.

Sir, I refer to George Magnus’ “New regime’s growth pledge poses challenge for the US central bank” December 14.

In it, like many other commentators, Magnus draws comparisons between current Trump/Steven Mnuchin economic plans, with the lowering of taxes, and the Reagan years. He find several differences, though again like most or perhaps all commentators, he ignores the fact that during Reagan years, there was no such thing as risk weighted capital requirements for banks that distorted the allocation of credit.

That regulation stops us from getting the most bang out for any stimulus, be it tax cuts, QEs, fiscal deficits, low interest rates, etc.

If adjusted for it, the Committee for a Responsible Federal Budget’s already worrying estimates would even seem too optimistic.

What is truly harrowing though, is that those distortions are not even discussed, as if these did not exist, as if these should not be named.

For instance I have been unable for more than a decade to get straight answers from the regulators to some very basic questions, zero contestability; and Sir, FT’s Establishment has also refused to ignore these questions, notwithstanding my soon 2.500 letters to you on “subprime bank regulations”

@PerKurowski

For tax cuts to work, regulations that distort the allocation of bank credit to real economy must first be removed

Sir, I refer to Chris Giles interview of Arthur Laffer “Reagan’s tax guru predicts US nirvana” December 8

Let me be brief. Reagan ended his presidency on January 20, 1989. The Basel Accord, with its risk weighted capital requirements, was approved in 1988 but entered into real effect in 1992. Basel II, with its even more distortionary risk weighting is dated June 2004.

I don’t want to rain on anyone’s parade but, whether it is by tax cuts, fiscal deficits, QEs, low interest rates, or by any other thinkable stimulus, for these to work their way entirely into the real economy, the distortions in the allocation of bank credit must be removed.

Sir, as is, tax cuts will not produce what Laffer and other expect, and so resulting public deficits would increase dangerously the levels of public debt.

PS. Let me also invoking the spirit of Charlton Heston in Planet of the Apes: “Keep your stinking monkey paws off our banks, you dirty regulatory ape.

PS. Must one go on a hunger strike to have the Basel Committee on Banking Supervision answer some very basic questions?

@PerKurowski

QE-forever cycle of fiscal stimulus, with current bank regulations, can only generate a dangerously obese economy.

Sir, Satyajit Das opines that “QE-forever cycle of fiscal stimulus won’t generate a recovery” August 2.

He is absolutely right! A recovery, to be for real, to be sustainable, requires a dose of risk-taking, which is currently being negated as a result of the risk-weighted capital requirements for banks. Allowing banks to leverage more with what is perceived as safe, than with what is perceived as risky, allows banks to earn higher risk-adjusted returns on equity with what is perceived as safe than with what is perceived as risky… with expected consequences.

And credit to what is safe, mostly refinancing the safer past, provides mostly carbs to the economy, which results in flabby obesity. It is credit to the riskier future that can provide the best proteins an economy needs to grow muscular and sustainable.

And for sure, the negative rates, a subsidy for "the safe" doing something with money, is a clear expression of how obese our economies have already become.

PS. A brief memo on some monstrous mistakes of current bank capital requirements.

@PerKurowski ©

To drop money on an economy, without cleaning its clogged pipes, is not to give helicopter money a fair chance to work

Sir, Adair Turner the former chairman of the Financial Services Authority writes: “Eight years after the 2008 financial crisis the global economy is still stuck with slow growth, inflation levels that are too low and rising debt burdens. Massive monetary stimulus has failed to generate adequate demand. Money-financed fiscal deficits — more popularly labeled “helicopter money” — seems one of the few policy options left.” “Not too much, not too little — the helicopter drop demands balance” May 22.

What? Should we not first begin by clearly understanding why the stimulus did not work?

Turner writes: “Can we design a regime that will guard against future excess, and that households, companies and financial markets believe will do so. The answer may turn out to be no: and if so we may be stuck for many more years facing low growth, inflation below target, and rising debt levels. But we should at least debate whether the problem can be solved.”

Yes we should really debate! But we should start that debate by questioning the risk weighted capital requirements for banks, those that were first introduced by the regulators almost three decades ago, and later, in 2004, made much more poisonous with Basel II.

And so, just for a starter, I would ask these five questions:

1. Where did you regulator get the idea of being able to regulate our banks without first clearly defining what is the purpose of our banks?

2. Where did you regulator get the idea of giving a risk weight of zero percent to the sovereign, and one of 100 percent to those citizens that define the sovereigns’ strength? Do you really believe bureaucrats know better what to do with other peoples’ money than citizens with their own?

3. Where did you regulator get the idea of assigning a risk weight of 150 percent to those below BB- rated, and only one of 20% to those rated ex ante AAA that you know cause more the major bank crises in the world, when they ex post turn out to be risky?

4. Where did you regulator get the idea that assigning different capital requirements, and thereby different equity leverage possibilities, would not seriously distort the allocation of credit to the real economy?

5. And, where did you regulator get the idea that requiring banks to hold more capital against the risky, would not make it harder for the risky to access bank credit, and thereby increase inequality?

Sir, it is soon a decade since a big bank crisis broke out because of excessive exposures to something that was backed with very little capital, only because it had been perceived, decreed and concocted as safe… and yet that truth is not being discussed. Sorry, that is totally unacceptable. All evidence points to the tragic truth that highly unqualified technocrats are regulating our banks.

I advance the explanation that the previous stimulus had no chance of working because these regulations had clogged some pipes of the economy. And to drop helicopter money on an economy, without cleaning those pipes, is not to give helicopter money even a fair chance to work.

PS. Also, why should we trust the helicopter pilots?

@PerKurowski ©

We urgently need one judge hauling a bank regulator to his court, in order to ask him one very simple question

Sir, Chris Giles writes that Raghuram Rajan, the head of the Indian central bank said he was a supporter of stimulus policies to “balance things out” in short periods when households or companies are proving excessively cautious with their spending, but eight years after the financial crisis he said we now “have to ask ourselves is that the real problem”. “Underlying performance suffers from loose policies, says India governor” May 16. About time!

Sir, as you know, for a long time I have held that any stimulus policy is really wasted as long as the risk-weighted capital requirements for banks impede bank credit to flow efficiently to the real economy. Those regulations are just another stimulus for bank lending to “The Safe”, and that is not the kind of stimulus the next generations need.

Those regulations odiously discriminate against the access to bank credit of those perceived as “The Risky” like SMEs and entrepreneurs.

And I would love to haul any of the big name bank regulators, like Draghi, Greenspan, Bernanke, Ingves, Carney or many other, in front of a judge to have him, under oath answering the following question:

Mr. Regulator, current risk weighted capital requirements for banks indicate a risk weight of 150% for what is rated below BB- and of only 20% for what is rated AAA to AA. Do you sincerely believe that what is rated below BB- and that one would therefore presume is not an attractive asset for a bank, to be so much riskier for the banking system than those rated AAA to AA?

If the regulator answers “Yes”, the judge should ask for a detailed explanation.

If the regulator, being under oath, truthfully responds “No”, then the judge should ask: Does that not indicate that there is something fundamentally wrong with the credit risk weighting?

And then persons like me, who for over a decade have not been able to extract an answer from the regulators, would at least have something to work with.

In the case of India, such trial evidence could help us to remind Raghuram Rajan that risk-taking is the oxygen of any development. And of that if some developed countries seem to have had enough of development, and do not want to risk climbing further up their ladder, this does not mean that a developing country should copycat such dumb credit risk aversion.

@PerKurowski ©

Mario Draghi, if a nanny, would tell children “Beware of the foul smelling and be kind to the nice giving you candy”

Sir, Wolfgang Münchau comes out in a full-fledged defense of Mario Draghi and ECB against Germany. He argues that had Berlin raised investment spending at home the ECBs´ job of cutting short-term rates to negative levels and buying financial assets, in order to achieve its inflation target would have been easier and it would not have had to cut rates by as much. “The high cost of Germany’s savings culture” May 9.

I will not argue against this but just remind Münchau that no matter how much Germany cooperates, if the resulting stimuli cannot flow to where it can be best used, the whole exercise might just complicate matters more.

And in this respect Draghi is a bank regulator who believes those rated below BB- are more dangerous to the banking system, than those rated AAA... and that should be indicative enough that he, and his regulating colleagues, are simply not up to the job.

@PerKurowski ©

Most of our resilience capacity has been spent, for no particularly good or sustainable reason

Sir, I refer to Ludger Schuknecht’s “What bankers can teach stimulus-addicted economists” October 6.

Schuknecht writes: “In too many countries debt and public spending are high, and interest rates close to zero… Yet, after decades of attempts to fine-tune the economic cycle by running fiscal deficits and cutting interest rates at times of weak demand, many economies are fragile”

And I ask…why? Could it have something to do with credit risk weighted capital requirements for banks that stops banks from financing the tough we need to get going when the going gets tough… like “risky” SMEs and entrepreneurs?

Schuknecht writes: What governments save, because debt service costs are low, they often spend. Public debt in many countries is now well above 100 per cent of gross domestic product. This would have been unthinkable a decade ago.

And I ask… could it have something to do with this? In November 2004 in a letter published in FT I wrote: “I wonder how many Basel [bank regulation] propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector.”

Schuknecht writes: In too many countries debt and public spending are high, and interest rates close to zero. This leaves little room for effective policy when the next crisis hits — as it surely will.

And I fully agree: Indeed we have spent up most of our resilience capacity… for no particularly sufficiently good and sustainable purpose. 

@PerKurowski ©  J

All Europe’s banks would fail a test of whether they allocate bank credit efficiently.

Sir, Gavyn Davies writes “Stress tests will not themselves bring the Eurozone back to health” October 28.

He is absolutely right, because for that to occur it would all have to start with a test of how European banks are helping the Eurozone, and since the credit-risk-weighted capital requirements that caused the current deep economic malaise are still in place, banks would clearly fail that test.

Davies also correctly holds that “not all of the problems of a diverse banking system can be fixed at once”, but, unfortunately, all the banks can be made to have problems, by means of just one systemically faulty bank regulation.

And so when Davies writes “banks need to restore their risk appetite, having spent several years preferring to build their capital buffers rather than lending to risky small businesses” I must ask where has he been. Does he not know that banks, because of credit-risk-weighing are primarily building up their capital buffers, precisely by not lending to anything that requires them to have more capital?

Davies, concludes with “The best that can now be said is that a dysfunctional banking system should no longer be a fatal impediment to growth, on the optimistic assumption that the [fiscal, monetary, structural] and other measures that Mario Draghi has promised – including a sizeable monetary stimulus - come on stream.”

No way! Doubling down on a still so dysfunctional banking system would just waste away a sizable monetary stimulus- making it all so much more dangerous for Europe.

Ben Bernanke’s joke, will quite probably end up being on him.

Sir, Robin Harding reports: “Bernanke’ joke [‘The problem with QE is it works in practice but it doesn’t work in theory’] underscores questions on QE’s efficacy” October 13.

The joke might be on Bernanke because, as is, one could say it is just the opposite, QE might have worked, in theory, if in practice all the stimulus it provided, had not been channeled to where it was least needed.

As happened credit-risk weighted capital requirements for banks have blocked the way for QE liquidity reaching “the risky”, all those SMEs and entrepreneurs who could have helped to put some new sting into the economy.

As I see it we now have wasted a QE, and there is little we can do about that, so let us wait until QE has been soaked up, if it is ever going to be soaked up, to make any final evaluation of how the Fed and Bernanke did… let’s cross our fingers they did not too bad.

If monetary stimulus irrigates swamps and not deserts, it will make all so much worse.

Sir, bank regulators, by allowing banks to hold absolute minimal capital against what was perceived as “absolutely safe”, 1.6 percent or less, effectively injected huge amounts of liquidity in the economy. And precisely because of how these capital requirements were skewed, in favor of “The Infallible” and against “The Risky”, they directed our banks to lend too much, at too low interest rates and in too lenient terms to sovereigns, housing and the AAAristocracy, and too little, at too high rates and in too strict terms to “the medium and small businesses, the entrepreneurs and start-ups.

And with that distortion inflicted on the real economy, they not only created the current crisis but also keep us there. Unfortunately, even though he has assured me that he understands it, Martin Wolf does still not get it. And perhaps that is because this argument might stand in the way of his macroeconomic imbalances explanations. “We still live in Lehman’s shadow” September 18.

And, if now Wolf’s favorite to Fed chairman, Janet Yellen, does not understand that either, and is appointed, and keeps on swamping the swamps and drying the deserts, so help us God.

PS. Sir, jut to remind you again that I am not copying Martin Wolf with this comment. He has asked me not to send him anything more on “distorting bank capital requirements” as he already knows it all… at least so he thinks.

But I’d better whistle in the dark or sing too!

Sir there we are, sky-walking on a slack-wire over a high ravine in windy weather with no safety net under us, and Martin Wolf comes along with his timely advice telling us we could hurt ourselves by falling on either side, “How unruly economist can agree” February 26. Thanks! Now, how are we to remain calm?

Wolf recommends a very active use of a balancing pole which on one side (hand) has the closing of “structural current deficit relatively rapid”, to keep our faith in the sustainability of the public debt, and on the other, “credible temporary offsets, particularly via spending on investment and tax holidays”, as a stimulus for the economy.

Sounds swell but, since I am absolutely not as daring as a Maria Spelterine, I’d better also start doing some whistling in the dark or singing to stop me shaking like a leaf. “I’m singing in the rain.... what a glorious feeling...”

The debate has been sequestered by the machos and the wimps.

Sir Samuel Brittan seems to divide us economic debater between the machos, those who hold that this is no time for hesitance, better too much stimulus than to little and that we should forget about how we are going to pay for it all; and the wimps those, who urge more caution. In my case I confess that I often find myself among the latter, though mostly as a reaction to the runaway machismo of the machos. “Economic dominoes are still falling” February 13.

The truth, which as usual lies somewhere in the middle, is that we all should be very careful machos, and by which I imply we should stimulate a lot but make sure that every cent of stimulus counts.

In this respect (once again) I wish to point out that there are other issues that need to be looked at, such as the interest rates charged on credit cards.

To stimulate consumption placing compromises of a trillions of dollar on the shoulder of future generations of tax payers while at the same time allowing credit card companies to charge 17% interest rates in an economy where inflationary expectations are low, has nothing to do with machos or wimps, only with plain stupidity.

I am therefore proposing that the US government and the Congress should limit the interest rates that can be charged on credit cards to something like 5% and perhaps, for a year, as a partial compensation, pay the creditors an additional 3% on any balance financed. That stimulus cost would amount to a meager 30 billion dollars, per each trillion of credit card debt.

Doing it would put real money in the pockets of the real consumers and simultaneous work at solving the next wave of toxic assets soon to hit the markets.

Limit and subsidize credit card rates

I heard Geithner in the Congress and I read Martin Wolf’s “Why Obama’s new Tarp will fail to rescue the banks” February 11 and it is clear that they and most of us have entered into a quite unproductive phase of the debate, where we are all threading muddy waters not getting anywhere.

We should all take a break, from discussing solely about banks, and discuss those other participants of the economy we know as the consumers.

The US consumers face incredibly and unexplainably high rates on their credit cards, like 17% if in current status and 26% if in default.

Why does not the US government not limit those rates to 4 and 6% respectively and as an incentive offer to pay the creditor a 3% compensation on any balance financed over the next year? That would only cost a meagre 30 billion dollars per trillion of credit card debt.

Doing that would put real money in the pockets of the real consumers and simultaneous work at solving the next wave of toxic assets soon to hit the markets.

After such fresh air we might take up our current discussion with new energies.

A KeynesKeynesKeynes economic plan?

Sir Benn Steil is both correct and timely with his “Keynes and the triumph of hope over economics” February 6. But, just as well, he could have titled it “Keynes and the triumph of the shortcut over the real way”.

When we ser how many use Keynes to back up any call for stimulus, no matter how big, without even looking at what is going on at street level, like the enormous interest rates currently charge by the credit card companies to finance and refinance, it only reminds us how the credit ratings got their AAA ratings so wrong.

The world needs a Davos meeting without financiers

I just received a letter from one of those big banks that has recently received billions of dollars in official assistance. It informs me that if I finance my purchases with my credit card, where I have ample credit available since I repay all my consumptions monthly, my interest rate will be 17% and, if I enter into any default, 26%. This all in a country where there are no inflation expectations; the government is paying zero rate on its short term borrowings and contemplates a close to a trillion dollar stimulus package; and everyone wants the consumers to spend more to get the economy from falling. For a consumer to finance the anticipation of any purchases with these interest rates would be an act of extreme irresponsibility.

And then I read Martin Wolf’s “Why Davos man is waiting for Obama to save him” February 4, and though it seems such an utterly sensible article that recommends “focus all attention on reversing the collapse on demand now... employ overwhelming force. The time for ‘shock and awe’ in economic policymaking is now”; it only makes me reflect on how much we need a Davos type meeting where the financial sector is not invited and where one could freely dare to ask questions such as... why should we stimulate the economy before making sure that all the new green sprouts are not going to be devoured by some of the players in the financial sector?... and how could we get a finance sector that serves our needs too?

It is not a question of stimulus against public investments.

Sir Joseph Stiglitz pleads “Do not squander America’s stimulus on tax cuts” January 16 preferring the investment in infrastructure. The issue is wrongly phrased, it is not a question of either or.

If stimulus one needs to make certain that these go to those who provide the most effective demand creation in sustainable sectors; if infrastructure these have to create employment in the short term and serve as support for long term sustainable growth.

But, whatever alternative is chosen, there is a need to follow sound implementation principles. For instance, in infrastructure projects and in order to guarantee ownership, these should be proposed by the States municipalities or even private corporations; for transparency these should be approved by a public committee after a brief evaluation of the projects on what they offer in terms of jobs and sustainable growth; and, finally, for accountability, the projects should only receive the funds in strict pre-specified terms and conditions, cash on delivery.

Whatever, but please pull out the aching tooth fast!

Sir, Martin Wolf is absolutely right when he indicates that the window of opportunity for the USA to be able to sort out all that it needs in order to reassume economic growth of a hopefully more sustainable kind, before they hit the roof of unacceptably high levels of debt, is short, “Why Obama’s plan is still inadequate and incomplete” January 14. I would hold it to be very short.

It reminds me of a letter that I wrote to the Editor and that you published in August 2006 on “The long term benefits of a hard landing” and where I argued “that the gradualism of it all could create the most accumulated pain.”

The letter said “Why not try to go for a big immediate adjustment and get it over with? …. This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation… Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom, in a couple of decades.”

A lot of rain on a parking lot does little good.

Sir Wolfgang Münchau in “Following the Fed cannot save the world”, December 22, rightly presents some grave concerns with respect to “swamping the market with cash” before “restructure and shrink the financial system”.

In the same vein and as a citizen of an oil country accustomed to see liquidity pouring on asphalted parking lots without producing any results I am very concerned that the Obama mega stimulus will not help much unless the ground is better prepared to absorb the humidity. No stimulus in the world will suffice if the market does not believe in a future, and any effort to convince it of the contrary by pouring liquidity on it could only hinder its future take off.

The stimulus package needs to follow a credible story line not compensate for the lack of it.

Whatever, don’t forget the tax bill will be in the mail, quite soon.

A thirty year mortgage of 300.000 dollars at 11 percent rate to the subprime sector will, if made part of a security that because it has a prime rating is discounted at 6 percent, be worth 510.000 dollars. The difference of 210.000 dollars in financial air, pocketed as profit by an intermediary, will most probably be lost completely, no matter what happens to the housing sector. And so, if by any chance these are the kind of loses the governments are helping out with, they will not recover a single cent from it, and the taxpayer will have to make up for it, or it all breaks down in more inflation or in, gulp! … sovereign defaults.

This is why I agree and commend FT on starting to beat the drums on “Austerity must follow a stimulus”. November 13. Let us hope now that the G20 meetings do not take the form of an electoral campaign where only fiscal stimulus and tax rebates are offered and no one even speaks about the tax bill that must follow.

If it would not be for its very tragic implication it would be outright comic to see so many neo-Reaganites preaching the benediction of the Laffer curve, promising less taxes and more fiscal income… and even bail-out profits. What an amazing irresponsibility!