Most of those who either preach or negotiate free trade are just like a Peeping Tom in a nudist camp.

Sir, Alan Beattie, referring to the possible escalation of trade wars writes: “At the time the WTO is most needed, its failings become ever more manifest. Without reform, the organization itself will suffer severe, possibly fatal, collateral damage from the US-China struggle” "A global trading system under fire” October 22.

Beattie also quotesPascal Lamy, a former head of the WTO: “Whether we like Trump or not — and I do not like Trump, I think he must be credited with one thing, which is to have put this issue of WTO reform on the table.”

Having been busy denouncing failed and dangerous bank regulations, I have not followed WTO for more than a decade but, back in 2006 and 2007, I remember Grant Aldonas, Fred Bergsten and Martin Wolf already opining strongly on the need for WTO to reform.

The reforms requested were not only about efficiency… they were about the real core of free trade.

For instance Grant Aldonas held that the success of any reforms, depended on “WTO negotiators recognizing where the conventional mercantilist approach has taken them [so as to] turn around, head back up the road and chart a new course to achieve the development goals that were their original destination” “Why trade negotiators need driving lessons” May 3, 2006.

In a letter, I agreed stating “Currently trade negotiations, instead of opening the doors to the greener pastures we all wish for, feels more like someone corralling you in, to brand you.”

Grant Aldonas later also suggested a “plurilateral agreement among all WTO members willing to move directly to free trade on a global basis”, “A fresh free trade agenda for Doha”, July 13, 2007.

Again I agreed: “Just like in a nudist camp, we need to separate the real nudists from the Peeping Toms. Only this would allow us to conform a true and honest free trade core. It is clear that many of those who profess a belief in free trade fake it, since how could you otherwise explain the sort of perverse satisfaction many show from entering into negotiating processes that hinders the free trade from really advancing. The true spirit of free trade does not stand a chance against these saboteurs and who are simply too scared of taking off their protections, but want to enjoy the view anyhow.”

When Martin Wolf in April 2007 opined “If free trade is really as good as we say it is, then why should we negotiate about it”, I responded: “Indeed,you do not go to a nudist camp to play strip-poker!”

Sir, most of those holier than thou free-traders bashing President Donald Trump for imposing restrictions on trade, are just like a Peeping Tom preaching the merits of nudity, for other.

WTO bureaucrats also help make WTO inutile, as a result of many of them being engaged, primarily, in the protection of their own turf.

Protectionism comes in all colors and shapes. Those tariffs and subsidies imbedded in the risk weighted capital requirements for banks, are many times more costly to the world than any trade tariffs Trump can come up with.

PS. I myself must confess that, even though I am in principle all for free trade, I often find myself worrying about that all deficits and surpluses are not made equal, some are better, some are much worse.

@PerKurowski

Cutting taxes by means of inflation adjustment vs. reducing regulatory subsidies to state borrowings?

Sir, Sam Fleming reports “The Treasury has been examining the merits of adjusting capital gains taxes for inflation” “White House push to cut taxes for rich faces thorny obstacles” August 3. 

Fleming points out that the “initiative could cost $100bn or more over 10 years” and “Estimates from the Congressional Research Service suggest as much as 90 per cent of the benefits would go to the top 1 per cent of households.

Steve Moore, a visiting fellow at the Heritage Foundation opines: “It would be good for the economy. This is something we as free market people have been talking about for a long time.”

I am for free-markets, and I defended with great enthusiasm even more extensive inflations adjustments when they were introduced in Venezuela some decades ago, clearly before its current anti-free market regime came to power.

That said I would now use this occasion to ask, are such inflation adjustments, which reduces tax income, really compatible with the 0% risk weight assigned to the quite sizable US debt for the purpose of the capital requirements for banks?

That 0% risk weighting, de facto subsidizes US public debt, and which, on the tune of some 21 trillion in debt, could easily represent $100bn or more over 10 years.

If I were to choose, both from fairness and a free market perspective, I would much rather cut the bank credit distortions in favor of the sovereign than the inflation adjustment.

Just for a starter that would allow all to see better what the real unsubsidized interest rate on government debt is, and that should be useful, except fro those who do not want that to be known. 

PS. With a 0% interest rate, a 2% inflation target, how can regulators argue a 0% risk weight for a sovereign? That is of course unless they are from Venezuela or Zimbabwe, and only think of honoring public debts in nominal terms with the printing machine.

@PerKurowski

The access to bank credit war might be more dangerous than trade wars, but gets much less attention.

Sir, Cecilia Malmström, the EU’s trade commissioner when discussing the threat of trade wars writes about the need for“developing tools that allow instances of uncompetitive and unfair behaviour to be addressed quickly, whether these are linked to state intervention or to countries acting unilaterally on the international stage. It would also require greater control over subsidies and the operations of state-owned enterprises, for instance.”, “Reform rules-based trade before it is too late” July 27.

Absolutely, but how sad it is that another war waged with tariffs and subsidies, that of the access to bank credit war, does not receive remotely the same attention.

In a letter the Washington Post recently published I argued: 

“The risk-weighted capital requirements for banks also translate de facto into subsidies and tariffs, which have resulted in a too much-ignored allocation of bank credit war. 

One consequence is that those perceived as risky, such as entrepreneurs, have their access to bank credit made more difficult than usual, and our economy suffers. Another is that by promoting excessive exposures to what is especially dangerous, because it is perceived as safe, against especially little capital, guarantees that when a bank crisis results, it will be especially bad. 

In terms of Mark Twain's supposed saying, these regulations have bankers lending out the umbrella faster than usual when the sun shines and wanting it back faster than usual when it looks like it is going to rain.”

That war has among others assigned a risk weight of 0% to sovereigns and one of 100% to citizens, which allow governments to have “uncompetitive and unfair” access to bank credit. It will, as it destroys the markets capacity to signal the rates effectively, cause the over indebtedness of all nations… 0% risk weighted Greece was just a small preview of the tragedies to come

@PerKurowski

When does a subsidy become an outright gift? Hugo Chavez committed an odious economic-policy crime against humanity.

Sir I refer to Andres Schipani’s and John Paul Rathbone’s “Oil’s slide forces Venezuela to rethink subsidies agreed in Chávez glory days” January 15.

The article refers to “About 600,000 bpd of subsidized oil are consumed locally” but, since the local price of gas (petrol) is much less than 1-euro cent per liter, I would consider that to be much more of an outright gift than a subsidy.

The fact that Hugo Chavez gave away more value in gas (petrol) to those who drove cars, than what he spent on all his social programs put together, might be embarrassing for all those on the left for whom Chavez was a hero… but the truth is that, doing so, he committed an odious economic-policy crime against humanity.

Tweeting "Oil: The Big Drop"

Sir, I refer to your FT series “Oil: The Big Drop” December 16, in order to suggests some tweets.

Oil is 97% of Venezuela’s exports, and 75% of Russia’s. If oil prices go down 40%... bye-bye Maduro, bye-bye Putin?

Venezuela suffers shortages of basic goods & inflation of more than 63%, and yet its economy is to shrink only 3%?

Hunger or Freedom? High oil prices make Venezuela a medieval feudalism; with citizens serfs to an elected Lord of Manor

The State gets 97% of Venezuela’s exports. How much does its citizens’ relevance increase, each $1 drop in oil price?

If Europe wants high oil prices, to get high inflation, so to repay its sovereign debts, it should be institutionalized

The European taxman is scared European motorists will ask: Why does not gasoline prices go down much?

It seems like those who should have the largest vested interest in joining Opec are shale-oil extractors in the USA

Will there be new rounds of quantitative easing to bail out failed expensive oil lenders and investors?

Have green energy investors or subsidy dependents, adequately hedged against so much lower oil prices?

Ps. More tweets might follow

http://theoilcurse.blogspot.com

http://petropolitan.blogspot.com

Regulators have purchased the illusion of bank safety, by forbidding these to finance the risky future.

Regulators have purchased the illusion of bank safety, by forbidding these to finance the risky future.

Sir, I refer to James Grant’s “Low rates are jamming the economy’s vital signals” October 13.

When Grant writes: “What is new today is the overlay of officially sponsored bull markets on governmentally suppressed interest rates”, he is quite right.

And when he writes: “True prices are discovered, not administered. They are set in the open market…. The world should spare some censure, too, for the central banks’ manipulation of money market interest rates, their heavy-handed administration of longer-dated bond yields and their sponsorship of rising share prices. Just because the public servants do their well-intended work under the banner of the law does not make the results any less subversive”, he is also quite right.

Unfortunately, what Grant misses in order to make the public servants “subversive” activities much clearer… is what is most jamming the economy’s vital signals, namely the credit risk weighted capital (equity) requirements for banks.

That regulation allows banks to earn much much higher risk adjusted returns on equity when lending to what regulators, with immense hubris, feel can be designated as “absolutely safe”, than for what they, with equally immense hubris, feel can be designated as risky. And that, instead of negating the efficient market hypothesis like so many hold, included Nobel Prize winners, has impeded the efficient open markets to work.

Grant concludes: “Central bankers… have purchased short-term relief with long-term instability”. I wish not to argue with that but, as I see it, what central bankers and regulators have most purchased, is the illusion of bank safety, and this by paying the price of forbidding the banks to do what they are most supposed to do, namely to finance the risky future, hopefully with reasoned audacity… since otherwise, as we know, the present will stall and fall.

PS. Grant should also try to figure out how the fact that banks on loans to the "infallible sovereigns" need to hold much less capital than against anything else, subsidizes the "risk-free rate".

Do not reduce what is an economic crime against humanity to merely being a “petrol subsidy”

Sir, Daniel Lansberg Rodriguez, I presume my former colleague as columnist in El Universal, as I assume he has been censored too, writes about “slashing petrol subsidies” in Venezuela, “Latin America swaps its populists for apparatchiks” August 20.

Hold it there, “petrol subsidies” is not the correct way to describe selling gas at less than 1 US$ cent per gallon, at less than 1 € cent per 5 liters, less than 1 £ penny per 6 liters of petrol or gas.

To put it in its real current perspective it means that, more than US$ 2.500 are handed over to each one of the more than 5 million cars on the roads of Venezuela, representing a value that by far exceeds what the government pays out in all other social programs put together… if we now can count the gas/petrol give away as a social program.

The International Court of Justice should be able to also handle these economic crimes against humanity.

The economic impact of a “too big to fail" bank's” failure is monstrous, even if it had 100% equity.

Sir, I refer to Martin Wolf’s “‘Too big to fail’ is too big to ignore” April 16.

Wolf, like many, questions whether a 5 percent leverage ratio, and which translated into layman terms signifies a 19 to 1 debt to equity ratio, can be enough. Of course it is not!

That said the fact remains that if a monstrously big bank fails, in terms of its overall economic impact, whether it has 100% equity or 100% debt, is sort of marginal… wealth destroyed is wealth destroyed no matter how its financed. Clearly, the distribution of a loss matters but, for instance, would the world be sustainably better off, if it the one percenter’s lost all they had?

And so, out of three recommendations the IMF makes, just like Wolf I think the most important is to “reduce the probabilities of distress”.

And how is that done? As you well know in my opinion that requires committing to the dustbin of bad memories, the risk-weighing of capital requirements for banks.

The risk-weighing means that banks earn different risk-adjusted returns on equity on different assets, and this distorts all common sense out of the overall important credit allocation function of the banks.

Even worse, the current system guarantees that banks will have especially little capital when they encounter those icebergs which have always sunk bank systems, when cruising in waters perceived as “absolutely safe”.

And, here is a reminder. It does not matter whether the too big to fail banks allocates 100% correctly its resources, if the rest of the banking system doesn’t, since that way, the well behaved too big to fail, will anyhow go down, sooner or later, because there is no such thing as a stable banking system in a lousy and unstable real economy.

What current regulators do not understand is that making the banks safe begins by not distorting the allocation of credit, which they do!

The real losses of a banks, except perhaps for interest rates mismatch, do not occur on the liabilities and equity side of the balance, but on the asset side  

PS. With relation to the subsidies of TBTF banks there is some inconsistency, as some could argue that a subsidy could be necessary to keep these from failing. And even if labeled TBTF, banks are little or not subsidized at all by the markets, could that not be an indication of how fallible markets believe their rescuers to be?

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

Martin Wolf has forfeited his right to preach on budgets, public debt limits and the growth of the real economy

Sir, the whole Western World is flirting with self-destruction as a consequence of having accepted capital requirements for banks based on ex ante perceived risk. These only guarantee dangerous excessive bank exposures to “The Infallible”, like sovereigns, housing and the AAAristocracy; and equally dangerously small exposures to “The Risky”, like to medium and small businesses, entrepreneurs and startups.

Much of the problems of the huge public debt overhang in the USA, and in Europe, are a direct consequence of these regulations. 

I have written, and corresponded on many occasions about this with Martin Wolf. But, since he has deemed it fit to ignore the argument of how these capital requirements distort the allocation of bank credit, I at least feel he has forfeited any right to preach on budgets, public debt limits and the growth of the real economy, like he does in “America flirts with self-destruction”, October 2.

I am not that convinced about the health reform in the USA, since I believe it tackles insufficiently the root problem of excessive costs. Even so I would much rather prefer that the actual line drawn in the sand for any budgetary and debt limit agreement, was the total elimination on any discrimination based on perceived risks; something that should in fact already be prohibited because of the Equal Credit Opportunity Act (Regulation B)

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, since he understands it all… at least so he thinks. For instance I believe Wolf does not understand how subsidized sovereign debt is by these regulations and so in fact, the current public debt level, is considerably higher in real terms. Perhaps Wolf could benefit from reading Jens Weidmann's "Stop encouraging banks to load up on state debt" of October 1.

FT, are you allergic to “The Risky”, or just sucking up to “The Infallible”?

Sir, in “Britain needs an activist chancellor” March 11, you so correctly state: “Mr. Osborne should shift more resources from inefficient subsidies to uses that can provide a greater stimulus to the economy… [and that] smaller companies are being squeezed by the low availability of bank credit”

And is there any more inefficient subsidy than helping those bank borrowers perceived as “absolutely safe” to get even better terms, at the cost of making access to bank credit more difficult and more expensive for those borrowers perceived as “risky”, like for all those smaller companies you refer to?

Sir, I cannot understand why you insist on keeping silence on this extremely serious issue that is distorting the common sense out of our markets. Is it that you are allergic to “The Risky” or just that you prefer sucking up to “The Infallible”?

There is a need for building up bank capital for all their lending, especially for that lending to “The Risky” which required too little capital. But, temporarily lowering the specific capital requirements for banks when lending to “The Risky”, would be very helpful for the economy, and at no cost to the public sector, since the dangers of excessive bank lending to what is perceived as risky are really minor.

Our bank regulators, if energy regulators, they would subsidize oil, and tax methanol and ethanol

Sir, there are two comments that I want to make in reference to Robert McFarlane’s and George Olah’s “Let the market determine the best energy sources”, March 4.

The first is that since OPEC is cast as a runaway producer cartel that distorts the market, it is again timely to remind the authors that in Europe, by means of taxes on petrol-gasoline consumption, the European taxman gets more income per barrel of oil than the OPEC members who sacrifice this non-renewable resource.

Secondly, because they argue their case so well, I would like to ask for their support on the issue of bank regulations. Currently bank regulators, by allowing banks to hold much less capital when lending to “The Infallible” than when lending to “The Risky” are, in terms of energy, subsidizing oil and taxing methanol and ethanol, and that is of course pure lunacy.

What was now devalued in Venezuela was the official exchange rate of the bolivar, not the much less valued real rate

Sir, I need to point out a certain lack of preciseness in my friend Moises Naim’s “Venezuela’s devaluation is another desperate Chavez move” February 14. What was now devalued was the Venezuelan official exchange rate, since Venezuela’s “real” exchange rate, the result of dividing all the bolivares paid for all dollars purchased, has been suffering much larger devaluations for a long time. Just the fact that in Venezuela it is prohibited to make reference to a FX rate other than the official, does not mean it does not exist. Here you find for instance a link to the Green Lettuce.

In fact devaluing the cheap official rate for accessing dollars can in some circumstances could even help to revalue the “real” rate, at least initially, for a short while.

And in reference to domestic gas prices I also I believe it is important to point out that the current government, which calls itself socialists, has used up more value giving out gas basically for free, than the value in all their other social programs put to together, and, be amazed, this fact was not even an issue in the recent elections… the opposition has kept mum about it too, for about a decade.

End the damaging regulatory repression of risk-taking which subsidizes “risk-free” government debt.

Sir there is no question Lawrence Summers' recommendations for increased investments by the US Government is based on the government´s capacity for borrowing “at near-zero real rates of interest”, “End the damaging obsession with the budget deficit” January 22.

But why is he unable to see the real present danger in that the government is being able to borrow “at near-zero real rates of interest”? Is that something natural? Is that healthy? Of course not!

If the banks had to, as they should, hold just as much capital when lending to a “risky” citizen than when lending to “the infallible” government, then the current interest rate on US government debt, often the approximation of the “risk-free rate”, would be higher, as it would not have the benefit of this regulatory subsidy.

It is only if the regulatory taxing of “The Risky”, which subsidizes “The Infallible” is eliminated in the US, "The Home of the Brave", that its economy can start breathing freely again and grow sturdy... and this, of course, goes for Europe too.

It is high time to work on how banks, risk-takers and risk-taking can contribute net to taxpayers

Sir, Manmohan Singh, of the IMF, but in his own name, writes “It’s time to land the levy on risk takers, not taxpayers”, October 18, and he might be right and he might be wrong. Personally I lean towards the second because, if you really do not know what you are taxing might be producing it is hard to avoid any unforeseen consequences.

First of all, what we have to do is not to concentrate blindly on minimizing the direct cost for taxpayers of any financial failure, but instead analyze how to maximize the net result of what the financial sector produced was to the taxpayer. 

In fact one of the saddest aspects of the recent crisis is that the costs of cleaning it up might very well have been surpassed by all that opportunity cost which resulted from regulations that favored bank lending to “The Infallible”, and discriminated against “The Risky”, the small businesses and entrepreneurs. Who can swear that had the bank regulators not done that we could not perhaps have tons of good jobs for all our unemployed youth? 

In this respect I would appreciate regulators, IMF economists, and alike, first define to us with clarity what they believe is purpose of our financial system, and only thereafter opine how his proposal can better help us for that sector to fulfill its purpose. Most often than not, I am sure the answer would be, by not distorting its functioning like for instance with special levies. 

As a taxpayer let me be clear. I do not mind paying plentiful taxes if I am making plentiful income… so please do not try to save taxes by reducing my income. 

That of course does not mean that I would not oppose all the regulatory subsidies that help make some sophisticated bank dealings so sophisticatedly profitable, as these just distort just as much as taxes, sometimes more 

By the way, a reminder, the most severe real losses sustained the last years, have not been in derivatives but in plain vanilla operations, like securities backed with very real but very badly awarded mortgages to the subprime sector and which managed to get an AAA rating, the Spanish real estate sector, or loans to some “infallible sovereigns”.

By the way, a reminder, AIG would never have become a problem, had not the regulators enriched the value of their AAA rating so much.

Stealing and rent seeking has nothing to do with “social contracts”

Sir, your reporters, on the issue of fuel subsidies, April 19, wrote: “For oil producers such as Venezuela… fuel subsidies are part of the social contract and relatively manageable.”

Venezuela sell’s its gasoline locally for less than 2 US$ cents per liter. Your reporters should never ever confuse blind and irresponsible rent seeking by which, those in power, usually with cars, rob the implicit value of the petrol or gasoline, from those poor and not in power, usually without cars, with any type or form of “social contract”.