Why are tariffs on trade with others, worse than tariffs on access to bank credit for your own?

Sir, I refer to Martin Wolf’s spirited defense of free trade and not less spirited attack on Donald Trump for having turned the US into “a rogue superpower, hostile, among many other things, to the fundamental norms of a trading system based on multilateral agreement and binding rules.” “The US-China clash challenges the world” May 22.

Do I disagree? Not really, except noting that at least Trump follows the instinct to protect his own.

But where was/is Martin Wolf when bank regulators, for instance, with Basel II, require banks to hold 8% in capital when lending to their own unrated entrepreneurs, but allow his banks to lend to any other sovereign AAA to AA rated against no capital at all, or to any other foreign AAA to AA rated entrepreneur against only 1.6% in capital?

Sir, anyone who argues those differences in capital requirements are not de facto tariffs on the access to bank credit, have no idea of what they are talking about.

Truth is that since trade is about today, but credit is about tomorrow, I truly believe the Basel Committee and their affiliate regulators are, with their tariffs on the access to bank credit, doing much more damage than a Donald Trump.

But of course you dare not to favor the opinion of little me over that of your own chief economic commentator.

@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

Trade tariffs revenues should at least try to compensate those hurt the most.

Sir, John Authers writes of the facts of life that give “Free trade the strange ability to convince everyone, rich or poor, that they have lost by it”, “Nafta’s losers always drown out its winners” August 10.

Tariffs are used to supplant market decisions. Sometimes it could be good, like for instance when making sure your “Arsenal Of Democracy” is fabricated on homeland, but most often it is bad, only helping to enrich those capitalizing on crony statism.

Whatever, in any case there should be much more transparency on who are then going to decide, instead of the market, on the use of all revenues provided by the tariffs.

I argue this because, if for instance 100% of those tariff revenues went to finance a Universal Basic Income, then at least those most hurt would be partially compensated… and the redistribution profiteers would think less favorably of these tariffs.

@PerKurowski

In order to find common Nafta ground, US, Canada and Mexico must begin by clearing for robots and automation

Shawn Donnan and Jude Webber quote Robert Lighthizer, US trade representative, having told negotiators. “Thousands of American factory workers have lost their jobs because of these provisions.” “Canada and Mexico rebuke US as Nafta renegotiation starts” August 17.

If Nafta members take notice of what robots and automation has done to manufacturing jobs, in all of their nations, then instead of facing each other as enemies they would be sharing a challenge.

It still amazes me how the recent American elections failed to recognize the job opportunities lost to automation. Had that not happened, Donald Trump would have had to speak about a Wall against robots instead, and would not have become president… not that that would have solved much either.

Jobs lost to robots and automation is not an easy problem to handle as it does produce good results too. If I was Nafta I would begin by asking my partners: “How do we make sure our grandchildren will be able to live surrounded by 1st class robots and smart artificial intelligence and not end up with 3rd class ones and dumb AI? That would be a real positive and constructive challenge for it.

http://perkurowski.blogspot.com/2017/02/here-some-disorderly-lose-cannon.html

@PerKurowski

Since Brussels technocrats took EU members too much for granted, Brexit could perhaps turn into a better deal for UK.

Sir, Martin Wolf in reference to Theresa May’s Brexit “No deal is better than a bad deal” asks, “Why, after all, would the EU offer better terms to a non-member?” “Trade realities expose the absurdity of a ‘no deal’ option” June 2.

That is true; except for if the current membership deals are based on technocrats taking EU members too much for granted; and now waking up to the Brexit fact they should perhaps not do so.

Also, would these technocrats dare to further weaken their not too strong position by declaring a war on Britain, a war that most of the Europeans probably do not wish? Do Brussels generals really have that kind of credibility? I don’t think so.

Wolf writes: “Now Brexiters imagine the UK can refuse the EU’s terms for an amicable divorce and yet still count upon active and enthusiastic co-operation in ensuring the smooth flow of trade.”

Why can someone who like Wolf has attacked growing trumpist trade protectionism in the US, arguing it primarily hurts the Americans, yet be willing to accept the thought that trade protectionism from EU towards UK, would not hurt the Europeans too?

That is what Wolf should be informing Europeans of, so that they help to keep their hurt-egos technocrats from enforcing some stupid vengeance plans. But no, Wolf seems determined to want that UK should just take its well deserved punishment for not listening to his advice, and then shut up.

@PerKurowski

Why do bank credit’ surpluses and deficits not attract the same concerns as does trade’s surpluses and deficits?

Sir, Martin Wolf writes: “What is frightening about the trade agenda of the administration is that it manages to be both irrelevant and damaging. A relevant agenda would focus on the imbalances in savings and investment across the world economy” “Dealing with America’s trade follies” April 19.

Of course Wolf, like IMF among others, is right to be concerned with growing trade protectionism. What I can’t understand is why he, and IMF among most others, is not at all concerned with the consequences of financial protectionism?

I ask because the risk weighted capital requirements for banks are just like any other sort of tariff. It benefits some, and hurts other… in all it dangerously distorts the allocation of bank credit to the real economy, for no good purpose at all, as it does not promote financial stability, much the contrary.

In November 2004 FT published a letter titled “Basel just a mutual admiration club of firefighters seeking to avoid crisis” In it I wrote: “We wonder how many Basel propositions it will take before they 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.”

Of course there I was referring to the fact that the Basel Committee had decreed that the sovereigns were safer than the private sectors on which usually the sovereign depended.

Could the problem be that Wolf does not understand that allowing banks to leverage their equity (and the societal support they receive) differently for different assets distorts?

Or is it that Wolf, and the IMF, also belong to that admiration club and therefore dare or cannot breakup with its own groupthink?

Here again a link to some questions the members of such special club refuse to even acknowledge

PS. If I am obsessed with the risk weighted capital requirements for banks, which I am, then Martin Wolf must be just as obsessed with his “macroeconomic imbalances”.

@PerKurowski

Global supply chains should and will change, as robots and automation substitute more and more for cheap labor.

Sir, Shawn Donnan, referring to a recent report by the World Bank writes that a “report by World Bank economists yesterday highlights the fragile state of one historically important engine of global growth — trade” “Policy uncertainty threatens trade growth, says World Bank” February 22.

And he follows up with “One of the big consequences of the explosion in trade agreements in recent decades has been the emergence of global supply chains. Such chains are widely seen by economists to have made businesses more efficient and to have helped boost productivity”

Indeed, but certainly more than policy uncertainty, what could currently affect global supply chains, is that these were based on cheap labor, and more and more cheap labor is being substituted by even cheaper and cheaper robots and automation.

What amazes me is that it is almost impossible to find any statistics; from for instance the World Bank, IMF and OECD, on how many jobs have effectively been taken over by robots and automation, for instance the last year. That to me sure represents a big lacking of data required for projecting tomorrow. 

@PerKurowski

Martin Wolf, I totally agree it is not nice where we find ourselves, but you’re part of how we got here… I am not!

Sir, Martin Wolf writes: “Who would have imagined that primitive mercantilism would seize the policymaking machinery of the world’s most powerful market economy and issuer of the world’s principal reserve currency? The frightening fact is that the people who seem closest to Mr Trump believe things that are almost entirely false… Protection just helps some businesses at the expense of others… The rhetoric of “America First” reads like a declaration of economic warfare.”"Trump and Xi battle over globalization" January 25.

Indeed but then again: “Who would have imagined that primitive statist technocrats would seize the regulatory machinery of banks of the world? And the frightening fact is that the people who seem close to the Basel Committee, like Martin Wolf, also believe things that are entirely false, like that what is perceived as very risky is very risky to our banking system… which only helps to protect the access to bank credit of “the safe”, at the expense of “the risky”…The rhetoric of “We Regulators must make our banks safe” reads like a declaration of economic warfare.”

Sir, I am sure that had the world not silently accepted the risk weighted capital requirements for banks in 1988, which introduced such obnoxious statist concepts of assigning a risk weight of 0% to the Sovereign and 100% to We the People; and then in 2004 going on to assign a such a meager risk weight of 20% to what was AAA rated… the subprime crisis would not have happened… Greece would not have received so much in loans, and Trump would still busy himself with hotels and casinos.

Martin Wolf, I understand you are also a victim of that confirmation bias that have swept the regulatory circle, but your silence on the distortion in the allocation of bank credit to the real economy, makes you, ever so little, an accomplice of Trump’s rise to the presidency of America… so don’t just wash your hands like any Pilate.

PS. “rules-based trade” is not really “open markets”

PS. I did what I could.

@PerKurowski

FT, you have good reporters; send them to the Whitehouse to pose Trump some constructive questions on protectionism.

Sir, you write: “Forcing industrial output to return to the US is likely to create work for US-based robots rather than workers” “Take the US president’s protectionism seriously” January 25.

Precisely, that is what I have tweeted for some time now, and on which I have written some letters that you have steadfastly decided to ignore, like those on the subprime banking regulations, without thinking of it as any type of censoring, or without “without favour”.

But, without resorting to qualifying Trump’s protectionism as “profoundly retrograde” which means so little, which sounds so besserwisser, and which can only insult those who are then implied of having voted for a “retrograde”, why don’t you use your voice to send a journalist to Washington to ask of the Whitehouse, directly, some constructive questions?

For instance: “With current and future actions taken against foreign suppliers, in order to make America great again, what ratio of new employments of humans to robots do you foresee? How many robots have substituted for humans in jobs in USA during 2106?

And, if there’s a chance and a will, dare ask: Why does the Whitehouse think that trade protectionism is worse than that financial protectionism that is imbedded in the current risk weighted capital requirements for banks?

@PerKurowski

Financial protectionism could be just as bad or even worse than trade protectionism

Sir, I refer to the so plentiful anti-trade-protectionism writings, in FT and everywhere, and which all warn about the dangers of what Big Bad Donald Trump is up to. Many of these, not all, are solidly argued. Yet these contrast so much with the almost absolute silence against the financial protectionism that is imbedded in current bank regulations.

The risk weighted capital requirements for banks allow banks to leverage more with assets perceived, decreed or concocted as safe, than with assets perceived as risky. That means banks will earn higher risk adjusted returns on equity on the “safe” than on the “risky; so banks will favor with credit or investments what’s safe over what’s risky.

Is this not how it always is. Yes but before the introduction of these capital requirements the perceived risk was cleared for by the size of the exposure and the risk premiums charged. Now when capital requirements are also based on the same perceived risks, the effect of these in the allocation of bank credit to the real economy are augmented and so distort.

Here are some risk-weights of Basel II. Sovereign=0%, AAArisktocracy=20%, residential housing=35%, not rated “We the People”, like SMEs=100%, below BB-rated=150%.

Those who do not see how those with lower risk weights have their access to bank credit protected, against that of the risky, are not interested, dumb or trapped, almost irreversibly, by the mother of all confirmation biases.

@PerKurowski

How do you build a wall against the robots, the biggest threat for manufacturing workers here and there?

Sir, Martin Wolf quotes Richard Baldwin, author of the “The Great Convergence”, with that workers in South Carolina “are not competing with Mexican labour, Mexican capital and Mexican technology as they did in the 1970s. They are competing with a nearly unbeatable combination of US know-how and Mexican wages.” “Trump faces the reality of world trade” November 22.

That has an element to truth in it but, in many ways, the worst competition both Mexican and American manufacturing workers face in the future will come from technology, like robots.

How do you build a wall against job-stealing robots? No matter how that wall was built, your own consuming citizens would end up paying for it by paying higher prices.

One idea I have been toying with lately goes someway along the line of placing some type of payroll taxes on robots; first so as to permit us humans to be able to compete with these on a more level ground; and second so that with those revenues we could partially fund a Universal Basic Income, a Societal Dividend, which could provide us with a step-ladder to easier reach up to the growing gig-economy. 

That said, with respect to Trump and trade-deals I would just remind him of that no nation can be kept strong by cuddling up in comforting isolation and that probably the last legacy any President would want to leave behind him, is that of having weakened the Home of the Brave.

To top that up, quite gently, I would also point out to Trump that USA’s Declaration of Independence clearly states as one of its justifications, the need to stand up to “the present King of England… For cutting off our Trade with all Parts of the World”.

PS. In this context only as curiosa, the Declaration of Independence also mentions as a justification that “the present King of England…has endeavored to prevent the Population of these States… obstructing the Laws of naturalization of Foreigners; refusing to pass others to encourage their Migrations hither” 

@PerKurowski

In trade and carbon, though borders do not matter, distance does

Sir Angel Gurría is right in that “Carbon has no place in global trade rules” November 5, when referring to what happens on the borders. That said carbon has a very real place in trade, when considering the distances and means by which that trade has transported. If the concerned world which will be meeting in Copenhagen does not affect trade, then it is clearly not concerned enough or simply irresponsible. In fact, a stiff carbon tax on transport, might be just what the doctor ordered to revive all those local and otherwise inefficient jobs that have been lost earning the benefits of trade.

Financial Time’s Hillary Clinton interview

Sir the following is my reaction after reading the interview of Senator Hillary Clinton, conducted by Financial Times ’s Washington bureau chief Edward Luce.

Protectionism: Full fledged competition in a globalized world would have eroded the profitability of many companies had we not awarded them the protection of intellectual property rights, and invested some serious money in making that shield mean something. Can you imagine Microsoft in a world where efficient software copiers are free to roam?

Therefore since most of labor have not been furnished similar new protections, and some old ones have in fact been taken away, it should not come as a surprise that the share of labor income as a percentage of GDP is dropping, and that this is, certainly and rightly, creating a source of conflict.

So what’s to be done? There are only two choices? Either we award to labor similar protections which would set us all on a de-globalization route, a lose-lose proposition; or we must require that the beneficiaries of intellectual property rights give back some extra of their quasi-monopoly based extra earnings to the society. As an absolute minimum, this should represent the direct cost of enforcing and defending their rights. Is this protectionism? No at all!

Review of existing trade agreements: Absolutely. In some of the US bilateral agreement some prohibitions were imposed on developing countries because at the time they were considered as appropriate, but hindsight has led to other conclusions and so these clauses need to be revisited. For instance some US trade agreements prohibit any restrictions on capital movement even though now these restrictions are deemed quite good at taking away some of the excessive volatility that the waters of the global financial oceans can have on local bathtubs.

Energy and environment: “the most important thing is getting the US focused on energy efficiency, on clean renewable energy, combating global warming on raising gas mileage etc.” Just like the recent Nobel price recipient Hillary Clinton does not have the courage of spelling out what is primarily needed to really alter the energy and environment realities in the US, namely a substantial tax on gasoline consumption.

Housing crisis: Just like the US can sometimes use a Strategic Petroleum Reserve I would suggest the government buying a large amount of the houses currently involved with subprime loans; at a price below the current outstanding mortgage; financed by the current mortgage holder; and giving the current debtor a option to repurchase his house in a couple of years at a price that would keep the tax-payer form being harmed. That’s what I would do… but then again I am no PhD and so I could be wrong

Yes we need a Peeping Tom free, free trade core

Sir, I could not be more in agreement with Mr Grant Aldonas’ suggestion for the first part of “A fresh free trade agenda for Doha”, July 13, namely that of a “plurilateral agreement among all WTO members willing to move directly to free trade on a global basis”. Just like in a nudist camp we need to separate the real nudists from the Peeping Toms, as 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.