The dangers of the unknown unknowns are greater than those of the known unknowns.

Sir, Martin Wolf asks, “Is it possible to know the state of the UK public finances under present conditions?” He answers “No. The unknowns are too great.” “Some ‘known unknowns’ about the UK economy”, October 19.

Indeed, but to me, the most dangerous unknowns for the UK, and for much of the rest of the world, are the “unknown” unknowns. 

Like how much of the savings for the future, of those who are the least able to manage major upheavals, has been invested in houses; those homes that because of so much preferential finance increased their prices so much, that they were turned into also being risky investment assets?

Houses are good investments… until too many want to convert them simultaneously into main-street purchasing capacity.

Like how much of the illusion of public debt sustainability is solely the result of preferential regulations, like the Basel Accord of 1988 decreeing a 0% risk weight to sovereigns and a 100% risk weight to citizens?

Any sector given more preferential access to credit than other is doomed to unsustainable debt… just like Greece was doomed by the 0% risk weight some yet unknown EU authorities awarded it.

Sir, when compared to these in general unknown unknowns, the known unknowns, like Brexit or trade wars, are just peanuts. 

@PerKurowski

IMF, what are tariffs on billions of trade, when compared to tariffs and subsidies on trillions of bank credit?

Sir, Chris Giles, James Politi and Stefania Palma write about concerns during recent IMF meetings in Bali, “With the world’s two largest economies slapping tariffs on $360bn of goods so far this year, and possibly more to come” “Geopolitical tension casts pall over annual IMF meeting” October 15.

Last year I read somewhere that the just world’s 10 largest banks combined had over $25 trillion in assets. So when I think on how much the allocation of those assets might be dangerously distorted by the risk weighted capital requirements, I find it hard to understand that “the world’s two largest economies slapping tariffs on $360bn of goods so far this year”, was of so much concern during the recent IMF meetings

Sir, get it, the risk weighting of banks’ capital requirements, for bank protection purposes, translates de facto into tariffs and subsidies that will steer the allocation of bank credit.

The damage, by promoting banks way too much to be into banks “safe” AAA rated securities, residential mortgages and loans to sovereigns, while de-incentivizing loans to “risky” entrepreneurs and SMEs, is immensely worse than what the current trade-wars, sort of Lilliputian vs. Blefuscu in comparison, could produce.

Sir, again, for the umpteenth time, what the risk weighted capital requirements for banks guarantee is: 

Especially large exposures to what’s perceived as especially safe, against especially little capital, which dooms or bank system to especially severe crises. 

Especially low exposures to what is perceived as risky, like loans to entrepreneurs and SMEs, which dooms our economies to weakness and to not being able to reach their potential.

@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

Martin Wolf, ask the Greeks: Who is more dangerous, Trump with his trade tariffs, or​ ​bank regulators with their risk-weights?

Sir, Martin Wolf lashes out against the President of the United States’ “administration’s trade actions and announced [trade] intentions defining him as an “ignoramus” “Trump creates chaos with a global trade war” July 11.

I just know central bankers and bank regulators should know more about their specialized line of activity, than what a real estate developer should know about trade policy. And so, when it comes down to the title of world-class ignoramus, in my mind that one should clearly go to those who came up with the senseless idea of the risk weighted capital requirements for banks.

Dare to explain to a Greek that European technocrats assigned a 0% risk weight to their government, and that this was what led bankers into lending to it way over its capacity to use the loans. And then ask the Greek who is more dangerous, Donald Trump with his trade war, or bank regulators with their war, with subsidies and tariffs, on the allocation of bank credit?

Yes, Trump poses a threat to significant part of world trade, but the besserwisser in the Basel Committee have dangerously distorted most of the allocation of bank credit in the world.

PS. Here is a letter I wrote and that Washington Post published today and which has exactly to to with this theme

@PerKurowski