What the world needs is to introduce true diversity in its financial architecture.

Sir, I refer to “The world needs a new fin­an­cial archi­tec­ture” by Michael Krake, the exec­ut­ive dir­ector for Ger­many at the World Bank.

What if, keeping the UN, World Bank and IMF, we instead reform these institutions? As is, these are managed and governed by bureaucracy autocracies. 

November 2004, at the end of my short two-year term as an executive director in the World Bank, FT published a letter in which I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? 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.”

I had often expressed this at the World Bank Board but, those colleagues who understood what I referred to, and nodded in agreement, could do nothing. How could they, they were nominated by governments and most expected, and needed, to return to the government. What did not exist was real diversity. Not diversity based on gender or race, but diversity based on interests, life experiences and needs. 

Then I often suggested substituting some on the current executive directors with e.g., a plumber or a nurse; or at least to give a place at the board to that migrant community that, by means of its remittances, provided development countries with much more financial assistance than the multilateral financial entities could ever dream to do.

Now 2024, if I had the blessing to again be at that board of directors, I would drive my fellow directors to despair by, over and over again mentioning: “Give me ten seconds, I want to see what my friend ChatGPT opines on this.”

Would, “Without Fear and Without Favour” FT, be willing to publish a letter on what ChatGPT thinks?

http://voiceandnoise.blogspot.com/2006/05/world-bank-needs-to-go-truly-global.html

http://subprimeregulations.blogspot.com/2004/11/some-of-my-early-public-opinions-on.html

@PerKurowski 

What keeps IMF and World Bank so silent on bank regulations that go against their respective mission?

Sir, you argue, “If the IMF and the World Bank were to disappear, the absence of their combination of expertise, credibility and cash would soon be painfully obvious.” “Bretton Woods twins need to keep adapting” July 18.

Absolutely but they would also be sorely missed as the right places for having serious discussions on many serious issues that can affect our economies. 

But in that respect both have also been somewhat amiss of their responsibilities. The Basel Committee’s credit risk weighted bank capital requirements, which so dangerously distort the allocation of bank credit, have not been sufficiently discussed.

The World Bank, as the world’s premier development bank, knows that risk taking is the oxygen of any development. With this in mind it should loudly oppose regulations that so much favors the safer present’s access to bank credit over that of the riskier future. Doing so dooms our economies to a more obese less muscular growth. 

And IMF should know that all that piece of regulation really guarantees, is especially large bank crises, caused by especially large exposures to something perceived or decreed as especially safe, and that turn out to be especially risky, while being held against especially little bank capital. 

Why the twins’ silence? Perhaps too much group think, perhaps too close relations with regulators, something that could make this topic uncomfortable to discuss. 

PS. My comments to the Financial Stability Board

If you kick a crisis can forward, without correcting for what caused the crisis (2008), then when you run out of kicks, the can will roll back on you, only so much worse.

Sir, you write “The view of the global economy can best be described as murky but unencouraging”, “More gloom gathers over the world economy” April 13.

Since I have never thought of murkiness as a great promoter of encouragement, I must say that “but” was a bit disconcerting to me, that is, unless I should read it as a source of blissful ignorance.

That said, you refer to what monetary and fiscal policymakers must do, but you leave out the bank regulators, those who most definitely helped cause the 2008 crisis.

Though with Basel III they have introduced a leverage ratio the fact remains that, on the margins, there where it most counts, the risk weighted capital requirements for banks are still distorting, perhaps more then ever, the allocation of bank credit to the real economy.

How can I explain it? Sir, if you fill a financial irrigation system with huge amounts of liquidity (QEs) and ultra low interest rates, and some of its most important canals are blocked with high risk weighted bank capital requirements, there can be no doubt that bad things will happen. 

In 2006 you published a letter I wrote that exposed “The long-term benefits of a hard landing”. Sir, you tell me, where would we be today if our decision makers had taken that route? 

@PerKurowski

Bank regulators insist on feeding the systemic risk of credit ratings, even after it became tragically evident.

Sir, Kate Allen writes “Funds that allocate capital based on instruments’ investment grades and index weighting may look as if they are playing it safe but they are, in fact, taking a gamble, creating towers of risk, any floor of which could prove unstable… do not look to the canaries in the financial markets’ coal mines to sound an early warning. By the time the downgrades come, it will be too late” “Tail Risk” February 28.

Indeed by the “time issuers’ credit ratings were downgraded, [banks] were already staring the worst-case scenario in the face.

Basel II’s standardized risk weights for the risk weighted bank capital requirements:

AAA to AA rated = 20%; allowed leverage 62.5 times to 1.

Below BB- rated = 150%; allowed leverage 8.3 times to 1

Absolute lunacy! With the same risk weight banks would anyway build up much more exposure to what they ex ante perceived as very safe, than against what they perceived as very risky.

As is, that regulation dooms our bank systems to especially large crisis, resulting from especially large exposures, to what is perceived as especially safe, against especially little capital. 

Allen observes: “An investment structure that is revealed to have done a bad job only when disaster arrives, as in the financial crisis”. Unfortunately no. Bank regulators blamed the credit rating agencies, and not themselves for betting too much on these, and so that so faulty regulations that should have been eliminated with a big “Sorry!” is still very well active. 

PS. In FT January 2003: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”

PS. At World Bank: April 2003: "Market or authorities have decided to delegate the evaluation of risk into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market"

@PerKurowski

FT, do you really mean it?

FT, do you really mean that if David Malpass becomes president of the World Bank the Asian Infrastructure Investment Bank (AIIB) dominated by China will become a worthier development bank than WBG?

Sir, in “US makes a poor choice for World Bank chief” February 7, you lash out that if David Malpass becomes president of the World Bank, that will lead to a “dysfunctional organisation that will encourage its activity to shift to other development banks, including the Asian Infrastructure Investment Bank.” Really? Has this do to with David Malpass, or has this to do with someone else who is not to your liking?

In support of your doom you mention that Malpass’ “judgment even on economics, his supposed speciality, is wanting. Notoriously, as then chief economist at Bear Stearns, Mr Malpass was blithely confident about the strength of the US economy in 2007 — a year before the global financial crisis hit and his own employer went under” 

Sir, like many he had confidence in those AAA rated securities that SEC, which supervised investment banks in the US, allowed, based on recommendations of the Basel Committee, Bear Sterns to hold against only 1.6% in capital, to leverage over 62.5 times. I have not read much about you judging the regulators’ specialty wanting.

As for the World Bank you argue that its role is “providing global public goods such as managing scarce water supplies, combating pandemics and coping with the effects of climate change.”

No, its role is not to substitute for governments? The World Bank is a development bank, which means, at least in my book, its role is to help and assist financing countries to develop their own capacities to manage scarce water supplies, combate pandemics and cope with the effects of climate change.

Sir, you know I have a concern about the World Bank, namely that it does not object to the current risk weighted capital requirements for banks. I hold that it should, because risk taking is the oxygen of any development.

Who knows, perhaps someone who has seen first hand what happens if you trust what’s “safe” too much to be safe, might be exactly what the World Bank needs.

@PerKurowski

I hope David Malpass, nominated by USA, if confirmed as president of the world’s premier development bank, understands that risk-taking is the oxygen of all development.

Sir, Robert Zoellick writes: “If policymakers overlook the experience of developing countries during the crisis, they are less likely to consider emerging market dynamics, understand developing economies’ sources of resilience and appreciate vulnerabilities” “Who ever runs the World Bank needs a plan for emerging markets” February 6.

Of course no one should overlook experiences obtained during crises but, focusing excessively on these, puts a damper on the potential growth between the crises.

In his book “Money: Whence it came, where it went” (1975), John Kenneth Galbraith, referring to the accelerated growth experienced in the western and south-western parts of the United States during the 19thcentury, argued that it was the result of an aggressive banking sector working in a relatively unregulated environment. “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

For instance when banks are required to hold more capital when lending to their “risky” entrepreneurs, than when lending to their “safe” sovereign, as current Basel regulations mandate, that is bad enough in developed countries, but, in developing/emerging countries, it is absolute lunacy.

While an Executive Director in the World Bank 2002-2004, a time during which Basel I was discussed I did what I could to alert to the huge mistakes of its pillar, the risk weighted capital requirements for banks. Unfortunately I was not able to convey my warnings, and these were approved in June 2004.

I hope that David Malpass, now nominated by USA, if confirmed as the next president of the World Bank, fully understands the following:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements impede banks from taking efficiently the risks that are needed to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd.

Second, that what’s perceived ex ante as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large bank exposures to what is especially perceived (or decreed) as safe, against especially little bank capital.

God make us daring!

PS. Here is a brief summary of what I had to say on this issue before and during my term as an ED. It includes two letters published by FT

@PerKurowski

What I as a former Executive Director, pray that any new President of the World Bank understands

A letter to the Financial Times

Sir, I was an ED at WB from November 2002 until October 2004. During that time Basel II was being discussed. It was approved in June 2004. 

I was against the basic principles of these regulations that had begun with the Basel Accord of 1988, Basel I. That should be clear from Op-Eds I had published earlier, transcripts of my statements at the WB Board, and in the letters that I wrote and FT published during that time. Here is a brief summary of all that 

Since then I haven't changed my mind... that package of bank regulations is almost unimaginable bad.

I pray the next president of the world’s premier development bank, whoever he is, and wherever he comes from, at least, as a minimum minimorum, understands:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements, will distort against banks taking the risks that help to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.”, John A Shedd.

Second, that what’s perceived as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large exposures to what is especially perceived (or decreed) as safe, against especially little capital.

Sir, would you not agree that mine is a quite reasonable wish?

@PerKurowski

I trust banks and markets much more when regulators keep their hands off.

Sir, I refer to John Authers’ “In nothing we trust” Spectrum, October 6.

Let me give you brief one page version of my story:

1998, in an Op-Ed (in Venezuela I wrote) “In many cases even trying to regulate banks runs the risk of giving the impression that by means of strict regulations, the risks have disappeared…History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”

1999 in another Op-Ed “What scares me the most, is what could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

January 2003, in a letter published by FT I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

April 2003, as an Executive Director of the World Bank, in a formal statement, I repeated that warning: "Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market"

June 2004, the Basel Committee on Banking Supervision issued Basel II. By means of their standardized risk weights, they allowed banks to leverage a mind-blowing 62.5 times their capital if only an asset carried an AAA to AA rating issued by a human fallible credit rating agencies.

October 2004, in one of my last formal written statements as an ED at the Board of the World Bank I held: “We believe that much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions”

After reading an incomprehensible explanation provided in June 2005 by the Basel Committee I have, in hundreds of conferences tried to get the regulators to answer the very straightforward question of: “Why do you want banks to hold much more capital against what, by being perceived as risky, becomes less risky to our bank systems, than against what perceived as safe poses so many more dangers?” I have yet to receive answer.

So we have regulators who still, after a crisis caused exclusively by assets perceived as safe and that therefore banks could be held against less capital, allow especially large bank exposures, to what’s perceived as especially safe, against especially little capital. 

Sir, that dooms our bank system to especially severe crises. Why on earth should I or you trust them?

Sir, in hundreds, if not thousands of letters to you over the last decade, I have also tried to enlist FT in helping me ask that question (one that seemingly shall not be made) and to insist on receiving a comprehensible answer. I’ve had no luck with that either, so, respectfully, why should I trust your motto “Without fear and without favour”?

PS. Here is an aide memoire on the mistakes in the risk weighted capital requirements for banks.

PS. And this letter does not refer to the horrendous introduction of full fledged statism that happened when with Basel I in 1988 the regulators assigned a risk weight of 0% to the sovereign and one of 100% to the unrated citizen.

@PerKurowski

A world obsessed with Best Practices may calcify its structure and break with any small wind.

Sir, Nicholas Dorn in his letter “Drive for global banking conformity increases systemic risk” of September 18, refers to your leader article, “Waning co-operation will make the next financial crisis worse”, and MEP Molly Scott Cato’s letter “Global finance can work if rulemakers co-operate”, September 14. Dorn writes:

“Converging international financial regulation encourages similar business models and greater homogeneity of finance, raising systemic risk”.

“No one knows where the next crisis is going to come from. The more useful question is how the propagation of crises through the system can be minimised”

“The plain implication is the need for greater variation in finance, so that such risks as do arise cannot so easily ripple through the global ensemble. What is desperately needed, therefore, is not bland global conformity but more variation between important regulatory regimes.”

I could not agree more. In April 2003, as an Executive Director of the World Bank, I made the following formal statements at the Board, which relate directly to those fundamental points Dorn raises.

"A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.”

“Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.”

What else can I say? Well perhaps that that statement also included:

“Basel dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth”

Sadly Sir, as I have written to you umpteenth times, a different purpose for banks than just being a safe place where to stash away cash (and implicit to help fund the sovereign) is nowhere to be found in all the voluminous official writings about bank regulation.

Was I able to get my message thru? No! I guess the attraction of that with risk weighted capital requirements the regulators would be able to make our banks safer, was such that not even FT was (is) able to resist the songs of Basel Committee’s sirens. 

@PerKurowski

Remittances that help family and friends to survive, sadly, usually, help keep in power those who forced migrants to leave their homelands.

Sir, Gideon Long (and Vanessa Silva) report “Migration has also helped Mr Maduro to stay in power. The UN estimates that 2.3m people — 7 per cent of the population — have left Venezuela since 2015. Many are prominent opponents of the regime and while their voices are still heard from exile, they are no longer in Caracas orchestrating protests.” “Venezuelans display resilience in face of hyperinflation” August 25.

But how many millions Venezuelans are kept alive by the remittances from their emigrant family members or friends? Several millions? So that clearly helps the Maduro government to hold on to power much more than the absence of some prominent (but also until now quite ineffective) opponents.

Fifteen years ago I served as an Executive Director in the World Bank. My Chair also represented nations from Central America like El Salvador and Honduras, which had millions of migrants working abroad, primarily in the United States, and from where with great sacrifices, they constantly sent their families vital monetary assistance.

As much as I admired these emigrants, I abhorred knowing that their remittances were also helping to keep in power those who were basically responsible for them having to emigrate.

For instance if we assume that migrant workers remit 20% of what they earn, then according to remittance data supplied by the World Bank, in 2008 and with respect to Honduras, we could calculate Honduran migrants gross earnings abroad, representing 122% of Honduras GDP. And so, in economic terms, where is really Honduras?

Time and time again I push for the idea that, as a minimum minimorum thank you for providing their homelands with these lifelines, the migrants should at least have an important representation in their respective general assemblies. That way they could at least try to change the realities so as to be able to go back to their homelands, before they forgot these. “No remittances without representation”.

We often hear about the dangers that brain-drain could represent for these countries. I always thought heart-drain to be much worse menace.

@PerKurowski

Indeed, reforming the credit rating market is an urgent necessity. Indeed, shame on the regulators

Sir, Arturo Cifuentes concludes, “Reforming the credit rating market is an urgent necessity. Shame on the regulators” “Few lessons have been heeded 10 years after Lehman collapse” August 23.

Yes shame on the regulators! But also for some other reasons than those Cifuentes mentions.

Just for a starter, the credit rating agencies would never ever have caused so much damage had their opinions not been leveraged immensely by the risk weighted capital requirements for banks. Imagine, Basel II, 2004, allowed banks to leverage 62.5 times if only a human fallible credit rating agency assigned an asset an AAA rating. 

It should have been crystal clear that with that the regulators were introducing a huge systemic risk in the banking sector. That I mentioned for instance in a letter published by FT in January 2003; and I loudly explained and protested it while an Executive Director in the World Bank during those Basel II preparation days.

In Europe, the EU authorities even overrode the credit rating agencies opinions and assigned Greece a 0% risk weight, which of course doomed it to its current tragic condition. 

Then, let us mention the mother of all regulatory mistakes; for their risk weighted bank capital requirements, initiated in 1988 with Basel I, the regulators used the perceived risk of assets instead of the risks of those assets conditioned on how their risks are perceived? How loony, how sad, what a distortion, what a recipe for disaster was not that? And still, 30 years later, they do not even acknowledge their mistake.

By the way, when Cifuentes denounces that Solvency II, with its myopic risk view, will discourage insurance companies, the natural holders of illiquid assets, to hold these investments, and it will therefore increase the systemic risk by making their portfolios less diversified, I could not agree more.

Sir, you know that for over more than a decade I have written to Financial Times 2.787 letters objecting to the “subprime banking regulations”, this one not included. Galileo could indeed be accused for being obsessed with his theories, but, could those doing their utmost to silence his objections, the inquisitors, not be accused of the same?

PS. Cifuentes mentions “Olivier Blanchard’s 2016 admission that incorporating the financial sector in macro models would be a good idea”, I might have had something to do with that.

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

If we want real productivity data, we need consider real working conditions

Sir, I refer to my former colleague at the World Bank Kurt Bayer’s letter of August 16, “Real productivity is an efficiency measure”. I fully agree with what he argues, though, unfortunately, lately, life has become more complicated, even for statisticians. 

Some months ago, in Bank of England’s “bankunderground” blog, we read a post by Dan Nixon titled “Is the economy suffering from the crisis of attention?”. It said, “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

And so these interruptions should have to be recorded for what they are, meaning a consumption of distractions during working hours. If so, we would perhaps see a dramatic increase in productivity, in real salaries, in voluntary unemployment and in GDP.

In other words our current economic compasses might not be working properly, risking taking us in the wrong direction.

@PerKurowski

What if there had been a plumber and a nurse in the Basel Committee for Banking Supervision? Would the 2007-08 crisis have happened?

Sir, I refer to Andy Haldane’s “Diversity versus merit is a false trade-off for recruiters” July 23.

After just a couple of months as an Executive Director of the World Bank, I told my colleagues that since most of us seemed to have quite similar backgrounds (although I came from the private sector), if by lottery we dismissed two of us, and instead appointed a plumber and a nurse, we would have a better and much wiser Board. That of course as long as the plumber and the nurse had sufficient character to opine and ask, and not be silenced by any technocratic mumbo jumbo. 

For example what if when the Basel Committee for Basel II in 2004 set their standardized risk weights for the AAA rated at 20% and for the below BB- at 150%, a plumber or a nurse had been present to ask the following three questions:

1. Has that credit risk not already been very much considered by the banker when deciding on the size of their exposures and the risk premiums they need to charge?

2. My daddy always told me of that banker that lends you the umbrella when the sun shines and wants it back when it looks like it might rain, so is it not so that what is perceived as safe is what could create those really large exposures that could turn out really dangerous if at the end that safe ends up being risky?

3. And is credit risk all there is about banking? What if that below BB- rated has a plan on what to do with a credit that could mean a lot for the world, if it by chance turns out right? Are you with these risk weights also not sort of implying that the AAA rated is more worthy of credit?"

Those very simple questions could have changed the course of history as the banks would not have ended up with some especially large exposures to what was perceived (houses) decreed (sovereigns) or concocted (AAA rated securities) as safe, against especially little capital (equity), dooming the world to an especially serious crisis.

Sir, how do we get some nurses and plumbers, meaning real diversification, not just gender or race diversification, into the Bank of England and the Basel Committee? These mutual admiration club types of institutions, with their groupthink séances, urgently need it 

https://teawithft.blogspot.com/2004/11/basel-is-just-mutual-admiration-club.html

https://subprimeregulations.blogspot.com/2018/05/if-only-these-four-simple-questions-had.html

@PerKurowski

When huge mistakes that hurt all of us are made, but no one is even publicly ashamed for these, what does that hold for our future?

Sir, John Authers writes about “The power unwittingly vested in ratings agencies. Regulations steered fund managers into credits with a certain minimum quality. Banks knew the capital they had to hold as a buffer depended on the rating the agency gave credits they held. The result was fund managers left judgment on credit quality to the agencies, while trying to bamboozle agencies into granting higher ratings than many securities deserved.” “Consultants’ claims and the evasion of responsibility” July 20.

“Unwittingly”? Meaning …without being aware; unintentionally? 

No! John Authers should allow the regulators to get away with that!

One needed not to be an expert on bank regulations to know that assigning so much power into the credit rating agencies was (is) simply wrong.

A letter I wrote to the Financial Times that was published in January 2003, stated: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”

And as an Executive Director of the World Bank, in a workshop for regulators who in May 2003 were discussing Basel II, I opined: “I simply cannot understand how a world that preaches the value of the invisible hand of millions of market agents can then go out and delegate so much regulatory power to a limited number of human and very fallible credit-rating agencies. This sure must be setting us up for the mother of all systemic errors.”

And in a formal statement at the Executive Board of the World Bank in March 2003 I prayed: “The sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies will introduce serious and fatal systemic risks into the world, is by having an entity like the World Bank stand up to them”.

So unwittingly it was not! And, really, if it was, then the more reasons to get rid of all those regulators fast.

Authers writes: “The problem is that when nobody takes responsibility, bad decisions can flourish”. Indeed, it is seriously critical for all of us that those who make serious mistakes are held accountable for it. 

So let me ask Sir: How many regulators have been fired or at least been publicly ashamed for this issue of the excessive importance to credit ratings, or for that matter for the much larger and serious issue of the utterly faulty risk weighted capital requirements for banks? Not a single one?

Could that partly be because you Sir, and too many of your colleagues, for whatever reasons of your own, have treated these regulators with the softest of the soft kid gloves?

Sir, as far as I know, you have not even been able to ask the regulators why they think that what is perceived as risky is more dangerous to our bank system than what is perceived safe.

Could it be because “Without fear and without favors” does not want or dare to hear the answer, or ask friends that question?

@PerKurowski

If you want real profound gender diversity at company boards, think of nominating housemothers

Sir, Daniel Thomas discusses the issue of having more women on corporate boards “Shareholders can do more to bring about boardroom diversity”, June 2.

More than a decade ago, as an Executive Director at the World Bank, I told my colleagues “We all have, more or less, quite similar backgrounds. If we were by means of a lottery substitute a plumber and a nurse, for two of us directors at the board, I am sure we would have a much wiser board”. I do not remember what my colleagues replied… or if they did.

Now, hearing the currently so frequent demand for more gender diversification, I feel the same. Having women educated similarly to the men they are to substitute for, brings much less diversity into the boardroom than what could be expected. 

If you want deeper meaning gender diversification, then invite housemothers to work some hours as board directors. The challenges mothers have to confront in their daily routines are way often much harder and much different from those that their then men board colleagues face.

Also, as an economist, to guarantee more gender income equality, start by arguing for parents, most usually women, to be remunerated for their socially so important work of taking care of their children or elderly. Unfortunately housemothers, just as the unemployed, do not have unions to take care of their interests. 

@PerKurowski

To save us from “calm waters” and recover economic dynamism, get rid of risk weighted capital requirements for banks

Sir, Tim Harford writes: “economic dynamism is at risk… John Haltiwanger has charted a fall since the early 1980s in the rate of start-ups, business exits, job creation and job destruction…Calm waters eventually stagnate. It is time to agitate the real economy…But how? …support for small-business finance, would all add much needed fizz to the economic system.” “Eerie quiet marks Black Monday’s anniversary” October 22.

That “how?” must include getting rid of the absolutely insane risk weighted capital requirements for banks

Sir, as a member of the Civil Society, during the Annual Meetings of World Bank and IMF, and for the umpteenth time during such occasions, I asked the following question:

“As the world’s premier development bank the World Bank must know that risk-taking is the oxygen of any development. So why is it still not speaking out against the risk-weighted capital requirements for banks that put a brake on risk-taking, like on the lending to SMEs small and medium sized enterprises…even though never ever has a major bank crisis erupted because of excessive exposures to something ex ante perceived as risky.”

After Jim Yong Kim gave a very valid answer, but not one that directly addressed my concerns, IMF’s Christine Lagarde jumped in with:

“I am actually tempted to address also this question, is that okay?

Because I think it is an important point and one that has very complex ramifications. It has complex ramifications in the banking regulations business, in the banking supervision business, and in the accounting business.

And then it is at the very junction of between sorts of self-established model by the banks versus models established by the supervisors. 

I think we both would agree that methods that would actually encourage the lending by banks and by insurance companies and by pension fund to SMEs, you know with the risk associated with it, should actually be very much in order.

At the moment the risk weighing methods and the models that are being used are discouraging from actually investing and taking risk to benefit the small and medium sized enterprises 

And that’s not necessarily the best avenue to support the economy and to support entrepreneurs who want to have access to financing.”

Sir, as you can see the IMF is finally opening up its eyes to the distortions in the allocation of bank credit that are produced by current bank regulations… those which FT has been so steadfastly silent on… even though I have over the years sent you about a thousand letters on this specific issue.

FT, when will you be fearless and without favour enough to take up this issue?

Here is a transcript of my question and the answers received during AM2017.

And here is an old homemade YouTube in which I try to give an explanation as simple as possible of what is so wrong with the risk weighting.

God make us daring!

PS. By the way are you not at all curious how regulators, in their standardized risk weights of Basel II, came up with only a 20% for those so dangerous AAA rated, and a whopping 150% for the so innocuous below BB- rated, those that bankers do not touch even with a ten feet pole?

@PerKurowski

As a bare minimum the real Venezuela should now create a Recovery Inc., to get back what’s been stolen from it.

Sir, I read John Paul Rathbone’s and Shawn Donnan’s “Markets urged to prepare as IMF weighs exceptional Venezuela rescue” October 17. Sadly it misses some important points.

Suppose that there is a new government… because with the current one there is nothing to be done, there should be nothing to be done.

Then you can initiate a worldwide recovery effort of what was stolen from Venezuela and that could, should, yield let us estimate at least $50bn, and that after the bounty hunters or whistleblowers have been paid their commissions.

If you stop giving away gas in Venezuela, something I am trying for the World Bank or the IMF to declare as a punishable economic crime against humanity, then you would release, in a sustainable way, billions in resources year after year. Look at it this way, Venezuela sells gas (petrol) at less than $1 cent per gallon, Norway sells it at $2.07 a gallon.

Also, just clearing the air of the current bandits, would release the energies of at least a million of Venezuelans full of initiatives that are dreaming of returning to their country.

And, if there is not a new government, then an exiled government, like De Gaulle’s French government in London during World War II, and which counts with a legitimate National Assembly, and a legitimate Supreme Court (in exile), could, should, at least get going with Venezuela’s Recovery Inc.

Of course, at the end of the day, the oil revenues must begin to be shared out directly to all Venezuelans, instead of being manipulated by the chiefs of turn, because a tragedy in waiting like Venezuela’s current one, should never be permitted to happen again. 

http://radicaldelmedio.blogspot.com/2009/10/recuperadora-inc.html

https://perkurowski.blogspot.com/2017/10/world-bank-please-dare-tackle-issue-of.html

https://www.carnegiecouncil.org/publications/archive/policy_innovations/commentary/000083

@PerKurowski

Why would someone look in the drawer for the whole set of cutlery he wants, if he only purchases spoons?

Sir, Tim Harford discusses the need for diversity and the difficulties of ascertaining the right one. “Looking for a knife in a drawer full of spoons” September 9.

As one who had never worked in the public sector, but got still dropped on the World Bank as an Executive Director, I found there numerous occasions to scream out for more diversity.

For instance, when the search for a new Chief Economist for the World Bank was announced, we were told that although it was obviously quite a delicate task, it should not take too long, as the search had to be carried out within “quite a small and exclusive community of development economists.”

Naturally, most of my arguments, like when trying to explain to my fellow board directors that substituting, with a plumber or a nurse, two of us directors selected by lottery, would make us a wiser board, fell on deaf ears not a iota interested in rocking the comfort of sameness.

How could we get more diversity? Perhaps by requiring some boards to document why they think they are sufficiently diversified. Of course that does not mean accepting as an explanation, the existence of a racially and gender diversified group in which all members have pursued the same academic degrees and the same type of jobs.

Of course where we most need diversity is among our bank regulators. The fact they can live with 20% risk weights for that which could generate dangerous excessive exposures, like to the AAA rated, and one of 150% for what is turned so innocuous by being rated below BB-, only evidences the existence of a mutual admiration club with members engaged in very incestuous group-thinking.

Sir, isn’t it ironic that those regulators supposed to make our banks safe, are especially endangering our bank system?

@PerKurowski

World Bank, once again, the Basel bank regulations’ implicit risk aversion, attempts against any development.

Sir, Shawn Donnan writes: “In an interview, Paul Romer, World Bank chief economist, said the long-term effect of weak investment on developing economies was one of the main long-term challenges facing the global economy.” “World Bank warns on weak investment” June 5.

In October 2007, at the High-level Dialogue on Financing for Developing at the United Nations, in New York, I presented a document titled “Are the Basel bank regulations good for development?” It contained among many other the following paragraphs:

“It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope, since risk taking is an integral part of its economic vitality, but it is a real tragedy when developing countries copycats that and falls into the trap of calling it quits.”

“The World Bank, as a development institution, should have played a much more counterbalancing role in this debate, but unfortunately it has been often silenced in the name of the need to "harmonize" with the IMF. Likewise, the Financial Stability Forum is also, by its sheer composition and mission, too closely related to the Basel bank regulations to provide for an independent perspective, much less represent the special needs of developing countries.”

“For the record, let us state that although we have made the above comments from the perspective of ‘finance for development,’ most of the criticism put forward is just as applicable to developed countries.”

“To conclude, we wish to insist that no society can survive by simply maximizing risk avoidance; future generations will pay dearly for this current run to safety.”

Unfortunately my arguments have gone nowhere. As is, the wagons circled by bank regulators to fend off any criticism, has been impenetrable to truths such as those implied in John A Shedd’s “A ship in harbor is safe, but that is not what ships are for”.

PS. 2002-2004, as an Executive Director of the World Bank I did what I could to silence those sirens singing that the risk weighted capital requirements would make our banks, and our economies, safer. I stood no chance. Basel’s siren’s song sounded much sweeter.

@PerKurowski

World Bank: How can we create decent and worthy unemployments to help face a worldwide structural lack of jobs?

Sir, Kristalina Georgieva, writes about the needs for jobs, the difficulties involved with creating these jobs, everywhere, and of how the World Bank is trying to help. “Job insecurity is a fact of life for young people” April 22.

That is all very commendable but what I truly miss, for instance during the 2017 Spring Meetings of the World Bank and IMF, is a discussion, long overdue, about what to do if sufficient jobs are nowhere to be found.

The very real possibility of hundred of millions of young people soon facing the prospects of a lifelong lack of employment, perhaps only eased by some few temporary gigs, is a monstrous social challenge, that must be tackled in time.

For instance if in order to create jobs, we invest so much that there is little left over for taking care of if we fail to do so, then perhaps our problems could compound.

And I am of course not talking about the normal set of social safety nets to take care of a temporary lack of jobs, but of much more fundamental measures… like perhaps the need of a well funded universal basic income paid out to all.

http://perkurowski.blogspot.com/2012/04/we-need-worthy-and-decent-unemployments.html

Education is of utmost importance for creating jobs, but business as usual will not suffice. For instance some of the remuneration of teachers and professors need to be contingent on how it goes for the students. The current way of loading up university students with debt, that has to be repaid no matter what, basically in order to pay professors great salaries up front, smells a lot like a scam… or like bankers’ bonuses based on short-term results.

http://perkurowski.blogspot.com/2007/01/should-not-higher-education-be-more-of.html

PS. Had the issue of how robots and automation is impacting the job market been raised earlier, we would perhaps not have to be listening to useless Wall construction proposals.

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

@PerKurowski