Beware, the more you trust data, the more you have to be absolutely sure about how to interpret it, and about what to do with it.

Sir, John Thornhill writes: “In his Alan Turing Institute lecture, MIT professor Sandy Pentland outlined the massive gains that could result from trusted data… the explosion of such information would give us the capability to understand our world in far more detail than ever before”, “Trustworthy data will transform the world” March 6.

Indeed, but that also leads to other bigger dangers, not only because we might trust that trusted data too much, but also because we might not know how to interpret or what to do with that trusted data.

Like for instance the regulators with their current risk weighted capital requirements for banks. These establish that the riskier an asset is perceived the larger the capital a bank has to hold against it. Does that make sense? Absolutely not!

It is not if the perceived risk is correct, meaning the ex ante risk perceived ends up being the real ex post risk, that poses any major danger for our banking system. It is if the risk perceived is incorrect, that the real big dangers arise. And, of course, the safer an asset is perceived, and the more bankers trust that perception to be right, the longer and the faster it can travel down the dangerous lane of wrong perceived risks.

What detonated the most the 2007 crisis? The securities backed with mortgages to the subprime sector rated AAA by “trustworthy” credit rating agencies, in fact so trusted that the Basel Committee, with Basel II, allowed banks to leverage 62.5 times their equity with such “safe” assets.

@PerKurowski

Martin Wolf, bank regulators ordered trust to crumble, so the west is already falling. Your silence is complicit

Sir, Martin Wolf lashes out at the possibilities of Donald Trump being elected president of US and on its consequences. I agree though I would not go to such extreme as arguing that “It would, for example, end efforts to manage the threat of climate change, possibly forever”. "If trust crumbles, the west is lost" September 28. 

But I also believe that the possibilities of the US, among democrats, republicans and We the People, to put a stop to most potential Trump lunacy is very big… almost a certainty.

But in my firm opinion the west is already crumbling thanks to those statist and risk adverse regulations that were introduced in 1988 with Basel I and that really exploded in 2004 with Basel II.

The credit risk weighted capital requirements with their risk weights of 0% for the sovereign, 20% for the AAArisktocracy, 35% for residential houses, 100% for We the (unrated) People and 150% for the below BB-rated outcasts, has completely distorted the allocation of bank credit to the real economy. The west was not built with such regulations but the west is certainly doomed to gloom with it.

Unfortunately, the world of top experts, renowned academicians and famed journalists, which includes Martin Wolf, have not been able to even bring up Basel’s distortion of bank credit into discussions. And the testers of bank stress keep on looking only at what is on the balance sheets and without caring a iota about what does not, like sufficient loans to SMEs and entrepreneurs.

If the west had to choose between Donald Trump and the Basel Committee, I know who I would vote for, again of course counting on a lot of support to reign in his worst excesses.

PS. Here are two questions that if a moderator of the US candidates for president debate I would ask:

Donald Trump, how much damage would the republicans and democrats allow Hillary Clinton to do if she is elected president?

Hillary Clinton, how much damage would the democrats and republicans allow Donald Trump to do if he is elected president?

@PerKurowski ©

The regulators distrust of bankers is condemning our economies to stagnation

Sir, Tim Harford writes: Steve Knack, an economist at the World Bank with a long-standing interest in trust, once told me that if one takes a broad enough view of trust, “it would explain basically all the difference between the per capita income of the United States and Somalia”. In other words, without trust – and its vital complement, trustworthiness – there is no prospect of economic development.”, “The meaning of trust in the age of Airbnb” August 13.

And that would also mean that distrust must equally be dangerous for the development; like when regulators distrusted bankers to adjust for the risks they perceived by means of the size of exposure and interest rates, and told them to also adjust, for that same perceived risk, in the capital account.

And because any risk, even if perfectly perceived, causes the wrong action if excessively considered, our economies are suffering from an inefficient allocation of bank credit. Much too much credit for the safe havens that risk becoming dangerously overpopulated, and much too little for the exploration of the riskier bays populated by SMEs and entrepreneurs. This mother of distrusts, is a real tragedy!

@PerKurowski ©

In this cynical age why do some, like Gillian Tett, trust so much the bank regulators to know what they are doing?

This is data found on the web:

The fatality rate per 100 million vehicle miles traveled in motorcycles is 21.45

The fatality rate per 100 million vehicle miles traveled in cars is 1.14

In 2011 in the US, 4,612 persons died in motorcycle accidents

In 2011 in the US, 32,479 persons died in vehicle accidents

And so, even though travelling by motorcycle is about 20 times riskier than cars, cars cause about 7 times more deaths than motorcyclists. That is of course because the riskier something is perceived the more care is taken to avoid that risk.

Sir, Gillian Tett after informing “that some online reviews by Amazon were fake or, more accurately, that authors could pay for a positive review” ends with “What is really interesting is that faith in the cyber crowd seems so resilient to scandals… online reviews will continue exerting a spell and act as a reminder of how we blindly trust things — even in a cynical age.” “Why we trust the cybercrowd” October 25.

Bank regulators have decided on higher capital requirements for banks when lending “the risky” motorcyclist of the economy, SMEs and entrepreneurs, than when lending to “the safe” car drivers, sovereigns and corporations with high ratings… even though clearly dangerous excessive lending to the latter is much more likely to occur.

Ms. Tett: In this cynical age, and even after the financial crisis, produced exclusively by excessive lending to what was perceived as safe, how come you still put so much trust in regulators, so as to ignore all my letters explaining their horrendous mistake?

@PerKurowski ©

Less trust in the Greek government has a great silver lining we can only hope lasts long enough.

Sir, Peter Spiegel writes: “Trust is so broken several eurozone officials say even if Greeks defy Mr Tsipras and vote Yes tomorrow, they may be unwilling to deal with his government to negotiate a new bailout.” “Trust evaporates after bewildering week” July 4.

Between June 2004 and November 2009, with Basel II, the regulators in the Basel Committee allowed banks to lend to the Government of Greece against only 1.6 percent in capital, which implies an authorized leverage of over 60 to 1 when lending to Greece… and if that is not an outrageously excessive trust what is?

And since banks were required to hold more capital when lending to the Greek private sector that also implied regulators believed Greek government bureaucrats could use bank credit more efficiently than the private sector… and if that is not complete lunacy what is?

The excessive trusting of Greek governments caused the current tragedy… and so less trust in its government cannot really be too bad. Let us hope that distrust lasts long enough for the Greek citizens to have a chance to rebuild their own country.

That said, the citizens of all other countries must also beware when Basel Committee brings gifts to their own government bureaucrats.

I refuse to believe in the Basel Committee’s nonsense of government bureaucrats using bank credit better than SMEs

Sir, you hold that “Bankers need to demonstrate that they know right from wrong”, “Regulation alone will not restore faith in markets”, May 27.

If you set the weight for the capital (equity) requirements for banks when lending to government at 0%, and at 100% when lending to SMEs, that means that banks will lend more and at lower relative rates to the government than to the SMEs. And that means de facto you believe that government bureaucrats are more productive using bank credit than SMEs.

Well, I refuse to believe that. I believe that if you believe something like that, you are either extremely dumb or a communist.

And I do believe that good non-distortive regulation alone will go a long way to restoring faith in markets.

But if you in FT insist on keeping mum on the fact that regulators are distorting and are manipulating the bank credit markets… I must ask: Sir Financial Times, do you know right from wrong?

@PerKurowski

You need to stress-test the American taxpayer first

Sir in “America’s fate is not in its hands” April 16, you mention the stress tests of the financial sector. Much more important than that would be to stress-test the American taxpayer.

What the US dollar bill really should state is “In the American Taxpayer We Trust” and so the more pragmatic Americans have printed the “In God We Trust” on it.

There is no way that the current American generation, having been brought up as the consumers of last resort in the world, would now turn around and accept to be the world’s taxpayers of last resort… at least not with the current taxes and any stress-test of them would show you that.

The US government should be much more conscious of this before launching itself on a fiscal spending stimulus binge which, if allowed by the markets, will build up its public debt to a totally unsustainable level.

That said I believe the market is going to say NO much earlier than that, since one thing is to be searching for a safe temporary haven and another quite different to be trapped in a permanent home.

And that is why, before the US Dollar loses its AAA rating, that the US, and the world, should work hard in developing a totally new generation of taxes that can be perceived as legitimate, that are aligned with the new global realities, and that interfere as little as possible with the functioning of a competitive economy.

If only the AAA had applied

Sir Gideon Rachman in “Sensitive words” March 27 draws our attention to an extremely sensible institution, Companies House that has to approve the use of some sensitive words before they can institutionally be used “because they are thought to convey an impression of authority or trustworthiness”.

How sad that those using “credit ratings AAA” did not submit an application. It would have saved the world quite many trillions of dollars or what´s almost the same pounds sterling.

Simply put, the nanny is not to be trusted.

There is nothing like some triple A ratings awarded to lousy securities and a Bernard Madoff experience to help a new generation of financiers to grow up and learn the hard way that their nanny is not to be trusted.

But it is also amazing to watch a society that has invested billions in paying the best tutors for their brightest to learn now being reduced to placing ads wanting a stricter fräulein… to trust.

Do not worry it looks like they are just staging it! Help!

Sir Sir Samuel Brittan clearly rapped all of us who dare to ask “how we are going to pay for it?” over our knuckles, “A framework for economic stability” December 5. We do not deserve it. In a world where the British Pound should have imprinted “In the British Taxpayer We Trust”, since that is all it has backing it, not asking the question could frighten away all economic stability. The quoted Harold Macmillan “Whatever the temporary difficulties from trying to run too fast, if we stand still, we are lost” might have benefited from having much less darkness around him than what exists now.

Having said that, Sir Brittan needs not to be overly concerned with any excessive prudence. In the US, all similar discussions on how to pay for it, and the screaming about the implications for the taxpayers, anyhow all end up with new tax-rebates being given.

Finally on Brittan’s quoting Friedman’s recipes for fiscal stability, how strange he did not comment on the absence in them of the regressive VAT.

What we need is trusting doubters

Sir Gillian Tett in “A lack of trust spells crisis in every financial language” March 18 should also remember that usually an excess of trust equally spells the origin of a crisis in any language. Tett spells out in no ambiguous terms that “the key to resolving this crisis will not lie with just the injection of billion more of central bank dollars; instead what is needed is restoration of credit” which is exactly trust.

That said and as true as it is, this time around let us please make certain that what we build is some reasonably doubting trust and not that type of blind trust that could only come out of such a preposterous idea that you could leave the issue of managing risks with some minimum capital regulations for the banks based solely on one risk type, namely default, and measured over a fairly short time horizon by some humanly fallible credit rating agencies.

About financial trust and integrity

Sir, Henry Paulson is absolutely right when he says that “The key test of accurate financial reporting is trust” May 17, but he totally ignores the most fundamental origin of trust, which is being able to look someone in his eyes.

If something is needed now in terms of trust in the financial sector that would be to de-corporatize the auditing process, so as to allow us to find next to each auditing statement the name and photo of the responsible auditor, or the names of the jointly responsible auditor team, and who are all willing to be held accountable and responsible for what they say, and will not run and hide behind any anonymous corporate veil. When Paulson mentions that “our markets must retain the integrity” he seems to have forgotten that integrity is inherently an issue of personal responsibility, impossible to delegate.

"In the US we trust" becomes global term of economic faith

Sir, Martin Wolf’s “America could slow us down” (September 27) somehow ignores the possibility that just as the Americans did when they accepted the “In God we trust” printed on their bills as an act of faith when the dollar abandoned its convertibility into gold, the world is now willing to live with an “In America we trust”, at least while there is such a world shortage of better alternatives. 

If this is so, one could argue that we have still far to travel on the roads of the American current account deficit currently used by the world to dollarize since the fact is that, if you want to lay your hand on a dollar, you have to sell or give something for it.

Frightening? Yes, but is not the world itself a frightening place that needs many acts of faith in order to make life bearable?

Published in FT, October 4 2006 (Censored?)

PS. That is of course as long as USA does not lose its military supremacy