Tim Harford, as an Undercover Statistician, why do you agree with the Basel Committee?

Sir, I refer to Tim Harford’s “Everything you need to know about statistics — on a postcard” February 10.

After reading it, I have one question for the Undercover Economist/Statistician, namely:

Why do you agree with the regulators’ statistics who, with their risk weighted capital requirements, opine that what is perceived as risky is more dangerous to the bank system than what is perceived as safe? Is that not crazy?

PS. ​Here is a​n aide-mémoire on the major mistakes with the risk based capital requirements

@PerKurowski

Is Tim Harford, the undercover economist, just covering up for other economist colleagues?

Sir, Tim Harford, The undercover economist, writes about “matching mechanisms to address allocation problems without resorting to traditional markets” as “Nobody wants… to be assigned a place on the whim of a well-meaning bureaucrat who doesn’t really understand the situation.” “The refugee crisis – match us if you can” May 21.

O yeah! But why does he allow well-meaning bank regulators, who clearly don’t understand the situation, to distort the so essential allocation of credit to the real economy?

One thing is sure, no matching mechanism ever, would help those who by being perceived as safe already have easier access to bank credit, like sovereigns and the AAArisktocracy, at the cost of making life harder for those who perceived as risky, already have more difficult access to bank credit, like SMEs and entrepreneurs.

And no matching mechanism ever, would push banks to build up excessive exposures against little capital to those who have always produced the big bank crises, namely those ex ante perceived as safe that ex post turn out to be risky.

Could it just be that the undercover economist is really just an economist covering up for other colleagues’ mistakes?

@PerKurowski ©

What a government spends is a lousy proxy for what the citizens receive; it ignores redistribution costs and profits

Sir, Tim Harford writes that the idea of a universal basic income “appeals to three types of people: those who are comfortable with a dramatic increase in the size of the state, those who are willing to see needy people lose large sums relative to the status quo, and those who can’t add up.” “Could an income for all provide the ultimate safety net?’ April 30.

And while doing so he uses figures for UK’s social security spending of £217bn, and on health and education spending of £240bn. 

Over the last 15 years the poor in Venezuela have most surely received less than 15 percent of what they would have received, had only the oil revenues been shared out equally among all citizens as a universal basic income. In such a case, supporting a net oil revenue funded universal basic income could be done by someone like me, someone who wants the state to become much smaller, who wants poor people to obtain more, and who can add quite well.

The basic mistake the undercover economist makes in this case, is that he equates all social support received by the needed with what is spent on them. That ignores the redistribution cost and profits. A universal basic income, that would put aside in different account much of the redistribution, would help bring more transparency to what the real cost of real government’s functions are. In these Panama Paper days, when so much concern is expressed on the issue of tax evasion and tax avoidance, there is little mentioning of the possibility that pure tax revenue waste could add up to much more.

Many wealthy non-leftists do harbor serious concerns about the growing income inequality, not only because of a sense of justice, but also because they know it could come back to haunt them. And so for them, a universal basic income distribution of a pro-equality tax, and which would not have to cost more than 2 percent in administration fees, might seem as a quite reasonable way to go.

Also many of us concerned with climate change but who also do feel quite uncomfortable with all the climate change profiteers who surround most initiatives, could find a huge gas/carbon tax paid out by means of a universal basic income scheme much better. For a starter it would beautifully align the fights against climate change and inequality.

And please, whenever I mention “redistribution profiteers’, I do not only refer to those who get cold cash and favors, but also to those so much worse, those populist and demagogues who take out their share in political power.

By the way here is a question for the Undercover Economist: Would our economies be better or worse had the QEs been redistributed in equal shares to the citizens?

PS. The problem with governments is not they are monopolies. It is they are operated and exploited by too many monopolists.

@PerKurowski ©

Tim Harford, what about taxing the sin of excessive risk aversion instead of subsidizing it?

Sir, I refer to Tim Harford’s “These are the sins we should be taxing” March 12.

Mark Twain supposedly said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” And we used to mock or even abhor the risk aversion there implicit.

But then came regulators and with their risk weighted capital requirements; which allowed banks to leverage more the equity with the safe than with the risky; which allowed banks to earn higher expected risk adjusted returns on equity with the safe than with the risky; which was a de facto tax on risk taking and a de facto subsidy of risk aversion; they made it absolutely certain that Mark Twain was more correct than ever.

And that is indeed socially harmful. Not only does it block the access of “the risky” to bank credit, the SMEs and entrepreneurs, something that causes both more inequality and lesser economic sturdy growth.

But in order for this truth to sink in, so as to do something about it, we need that persons like the Undercover Economist understand the difference between the possible short-term costs of risk taking, and the truly high and certain long-term costs of risk aversion.

Just because something is perceived risky does not mean it is risky, sometimes it means, ex post, that it is quite safe. Make sure you really know what is what in risk and sins, before you tax it. ​Know your base rate J

@PerKurowski ©

On allocating resources, why does the undercover economist care more about donations than bank credit?

Sir, I refer to Tim Harford’s “Ice bucket challenge: the cold facts” September 13.

In it he refers to the problem that many very well intended donation drives, for all types of individually very worthy causes, may not, in aggregate, reflect the best use of donations.

Who is to decide? Harford suggests: “GiveWell, an organization that aims to give donors the information they need to make the most effective donations”, a sort of donation effectiveness rating agencies. But, Harford would of course not go to the length of making donors have to heed the opinions of GiveWell, as that would of course give GiveWell a power that, sooner or later, it would be tempted to abuse.

But in banking that happens! Even though banks considered credit ratings and other risk information when deciding to whom to lend and at what rates, the besserwisser risk adverse Basel Committee decided that it had to intervene, and with its credit risk weighted capital requirements, it much favored bank lending to those already favored, “the infallible”, which of course meant that those who already had less access to bank credit, “the risky”, would have that even more restricted.

And so the question that remains is… why would the undercover economist Tim Harford care more about the efficient allocation of donations, than about the efficient allocation of bank credit?

Undercover Economist Harford, instead of "the volatility express" the rest of us we have, thanks to regulators, the volatility ball and chain.

Sir, in October 2004, in a written formal statement at the World Bank, as an Executive Director, I warned: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

And so I believe that, whether you like it or not, few have such credentials to talk about volatility.

And today I refer to Tim Harford’s “The volatility express” July 5. In it, Harford correctly describes the dangers for the financial sector of low volatility, in that it can foster a false sense of security; and the benefits for the economy of low volatility, as it can provide for the stable environment investors need in order to take risks.

But what the Undercover Economist, and you yourself, fail to understand, is that regulators, with their risk-weighted capital requirements for banks create not only an artificial false low volatility which becomes extra dangerous for banks, while at the same time, with the same risk-weights, they block the access to bank credit to those most willing to take risks when volatility is low.

And so, instead of the volatility express the “rest of us” would all like to see, we now have, thanks to regulators, the volatility ball and chain.