Compared to the Basel Committee’s statism and dangerous risk-aversion, Trump seems like a minor threat

Sir, John Kay discussing the election of Trump writes: “The post-cold war settlement that Francis Fukuyama characterised as the end of history — the combination of lightly regulated capitalism and liberal democracy — carried the seeds of its own destruction. The hubris that legitimized greed and proclaimed the primacy of shareholder value led to the global financial crisis of 2008 and, more generally, undermined the legitimacy of capitalist organization. “At last, the post-crisis political reckoning” November 12.

No! I hold instead that because of the Basel Accord of 1988, one year before the fall of the Berlin Wall, and which for the purpose of the capital requirements for banks set the risk weight for the sovereign at 0%, and for us We the People at 100%; the world has nothing to do with “lightly regulated capitalism and liberal democracy”; and all to do with “hubris [and ideology] that legitimized the greed and proclaimed the primacy [not of] shareholders" but of government bureaucrats, of the AAArisktocracy, and in this case of some naturally willing partners, the banks.

If the financial crisis of 2008 should have undermined anything, that is the statism and the risk aversion that resulted from allowing biased and inept technocrats to regulate.

We now live in a world in which the financing of basements, where unemployed youth can live with parents, is much favored over the financing of SMEs and entrepreneurs, those who could better generate the future jobs our young need to also afford becoming parents.

Sir, I fully agree that the election of Donald Trump as president of the USA, because of many of his utterances during the elections, raises some very serious concerns. That said I find it very hard to believe that he will be allowed to impact the world so negatively during the next four year, as the bank regulators have done during now soon three decades.

Risk-taking is the oxygen of any development. If you hinder it, the economy is bound to stall and fall.

God make us daring!

@PerKurowski

We have jobs because banks risked their (and our parents) money on “the risky”. Let’s give our kids the same chance

Sir, Sarah O’Connor reports on a UN forecast that indicates that “Global youth unemployment has started to worsen again after three years of modest improvement” “Finding work proves harder for world’s youth” August 25.

There are two angles to this story: How to create jobs, and what to do with those who will not get jobs.

With respect to job creation let me remind you, for the umpteenth time, that many of us hold jobs only because banks risked their and our parents money lending to many SMEs and entrepreneurs. And currently, because of the credit-risk-weighted capital requirements for banks, those loans are not available in significant amounts or in competitive rates. Our bank regulators should be ashamed of that as well as those who like you, keep so much silence on this.

And with respect to what to do with those without jobs, there’s no question that as a society it behooves us to at least find them some decent unemployments. For this day by day I become more convinced we need some sort of Universal Basic Income scheme that does not segregate our youth into those with jobs and those without.

@PerKurowski ©

Ms Merkel, Mr Renzi and Mr Hollande. Do you want to tackle growth and youth issues? Read the memo or give me a call.

Sir, Arthur Beesley, Anne-Sylvaine Chassany in Paris and Stefan Wagstyl report on that the leaders of Germany, France and Italy will attempt to forge a common plan to bolster Europe’s economy; and that Sandro Gozi, Italian secretary of state for European affairs said: “Europe needs an immediate answer on growth, youth and security issues”, “European leaders seek to bolster economy” August 22.

Part of that is because the result of that a the €315bn investment plan introduced last year by Jean-Claude Juncker, European Commission designed to tackle youth unemployment, during its first year, fell well short of expectations.

Here is what I would suggest they should do. They should ask their bank regulators whether when they regulated they gave any attention to the need that banks cooperate promoting sustainable growth and employment for the youth?

The answer they should receive, if the regulators were honest, would be: “Not one iota… all we cared about was for banks to avoid the risks we all perceive ex ante!”.

At that moment Ms Merkel Mr Renzi and Mr Hollande should begin to get an intuition that something is not smelling right.

In short, the current risk weighted capital requirements have banks avoiding the financing of the riskier future, and just keeping to the financing of the safer past, and that’s not the way for our economy to move forward, in order to not stall and fall.

Of course, if they want further explanation on how inept the current bank regulators are, they could read the following aide memoire, or they could give me a call.

@PerKurowski ©

To put “broken Europe back together” it needs to be freed from dumb risk adverse bank regulators

Norbert Röttgen, the chairman of the committee on foreign affairs of the German Bundestag writes: “Given the range of challenges the EU faces with Libya, Syria, Russia, the euro, youth unemployment and the refugee crisis, the most urgent and profound danger for the EU is not economic or geopolitical: it is psychological” “Let Germany put broken Europe back together” June 28.

But in his prescribed ways forward he, as basically all experts have been doing, ignores how Basel Committee’s risk-weighted capital requirements have blocked banks from financing the riskier future and kept them busy just refinancing a safer past. Banks not daring to explore risky bays, is no way for Europe to solve anything. That just guarantees Europe will finish suffocating, gasping for oxygen, in some dangerously overpopulated safe havens. 

Nothing has done so much damage to the Eurozone as these regulations. For instance, without the ridicule low capital requirements applied when lending to sovereigns, Greece would never ever have been able to accumulate so much debt.

PS. And when Röttgen writes “Europe is a different place now the British have voted to leave. It is up to the rest of us to determine what type of Europe it will be.” I do find it somewhat hard to agree. First Britain is leaving the European Union not Europe. And then why should EU want to be a different Europa, just based on if Britain is in or out?

And I knew about the Euro risks

@PerKurowski ©

Urgently fire those damn bank regulators who abandoned the young and ignored their needs for jobs and a future

Sir, I refer to the true tragical horrors described by Tobias Buck in “The fear and despair of Spain’s young jobseekers” March 2.

And I tell you again, though you will most probably ignore me again, that nothing as serious as that would have happened had not some few powerful and arrogant bank regulators, while trying to level the field for banks to compete, unleveled the real economies’ access to bank credit.

Read the chapters of “Capital adequacy and the Basel Accord of 1988” and “The BCBS and the social sciences” in Charles Goodhart’s “The Basel Committee on Banking Supervision: A History of the early years 1974-1997” 2012, Cambridge Press and you will understand. There is not one single reference to that how banks allocate credit to the real economy was of any concern whatsoever to regulators. And most probably it still is not.

Had they given that banks’ social purpose the slightest thought, they would have understood, unless too dumb, that their credit risk weighted capital requirements for banks impeded banks to adequately serve the economy.

Allowing banks to leverage equity differently based on “risk”, allows banks to earn higher risk adjusted return on equity on what is perceived or deemed to be“safe”, than on what is perceived as “risky”

So now “The safe” get too much credit on too lenient terms, while “The Risky” have no access to bank credit, that is unless they pay much higher risk adjusted premiums than they would ordinarily have to pay in an undistorted market.

Houses are safe so lend to that, but SMEs and entreprenuers the job creators are risky so cut them off!

Sovereigns are safe so lend to these, but the private sector is risky so, except for the AAArisktocracy, cut it off!

And so now our banks do not finance the “riskier” future they just refinance the “safer” past.

These regulators must be stopped! They are financial terrorists who threaten the future of our kids. And you FT must stop covering up for them.

“A ship in harbor is safe, but that is not what ships are for” John Augustus Shedd, 1850-1926

But not even ships are safe in a safe harbor if that harbor gets to be dangerously overpopulated.

@PerKurowski ©

Here a call in Spanish to the young to demand the risk taking they need

Here a letter in Spanish to the King asking for him to help the youth of Spain

Greece should be ashamed of presenting public sector pensions as a deal breaker, instead of youth unemployment.

Peter Spiegel and Kerin Hope report on FT’s front page that: “Mr Tsipras insisted he would continue to resist the cuts to public sector pensions demanded by creditors” June 18.

Sir, if I was a young unemployed Greek, I would go mad if I saw that the point of honor for my government, in order to negotiate or not with its creditors was the payment of the pensions of the public sector. I don’t understand how it can get away with this… or have all young Greek with any initiative already left Greece.

If I was Tsipras the following is the point I would make… or the line I would draw.

Europe, our bank regulators in the Basel Committee for Banking Supervision, all picked by you and none by Greece, decided that banks needed to hold much less capital when lending to our government, than for instance when lending to any unrated European SME.

And that meant that banks could leverage their equity and the support they got from the society much more when lending to our government than for instance when lending to any unrated European SME.

And that meant that banks could earn much higher risk adjusted returns on their equity when lending to our government than for instance when lending to any unrated European SME.

And so of course banks lent too much to our governments and too little to our SMEs.

If Greece wants to get out of its current predicament, and to be able to offer its youth good employments, these stupid risk adverse regulations must be reversed.

But that takes a lot of bank capital and we need you to helps us re-capitalize our banks. By the way you have the same problem with your banks.

@PerKurowski

If I was a young unemployed European I would ask Michel Barnier to parade down European avenues wearing a cone of shame.

Sir, I refer to Alex Barker’s and Phillip Stafford’s “Six ways Europe’s financial sector is meant to mend its ways” April 16.

I am not impressed. Because in Europe, the regulators still allows a bank to hold much less capital (equity) if it lends to “the infallible” meaning sovereigns, real estate or AAAristocracy, than when lending to the “risky” meaning medium and small businesses, entrepreneurs and start-ups.

And so in Europe, regulators seem yet not have been able to understand this allows banks to earn much higher risk adjusted returns on equity when lending to “the infallible” than when lending to “the risky”.

And so in Europe, regulators still distort the allocation of credit to the real economy; that distortion that created the crisis, too much lending to Greece, real estate in Spain, AAA rated securities; that distortion that causes too little lending, in competitive terms, to those who could create the next generation of decent European jobs. 

And so, as I see it, Europe has not even started to mend its ways

If I was a young unemployed European I would ask Michel Barnier and his Basel Committee and Financial Stability Board colleagues to parade down European avenues wearing dunce caps – meaning cones of shame.

If there is no great improvement on the youth unemployment front, Greece has no choice but to default.

Sir, Wolfgang Münchau writes that “This could be the moment for Greece to default” April 14. But when reading that “the rate of its youth unemployment in 2013 stood at 60.4 percent”, unless there has been much true progress on this front lately, the question would seem to be whether Greece has any other option.

When Münchau asks “who in their right mind is going to make a long term investment in a country with unsustainable long term debt?”, let us not forget that the most important long term investors in Greece are and should always be, the Greek youth.

By the way, as Münchau mentions “a new currency”, if I was a young unemployed Greek debating about staying or not staying in my country, I would run if what they come up with is for Greece to institute a new Drachma.

Instead of labor and capital struggling against each other, perhaps they should discuss what to do with their intermediaries

“The real disaster lies in youth unemployment” writes John Plender in “Recession has revived labour´s struggle against capital” January 11.

And there is no doubt he is right about it and there is no doubt we have no chance of solving it while we have bank regulators who insist on that “unexpected losses”, those for which they require banks to have capital, are higher for the “risky” than for the “safe”.

Because, by means of Basel´s risk-weights, this translates into the banks being able to earn much higher risk-adjusted returns on equity when they lend to the “safe”, than when they lend to the “risky”.

And that translates of course into that banks will not any longer lend to finance the “riskier” future as much as previous generations of banks did.

And Plender writes: “The real driver of income inequality over the past decade has been top pay – specifically, of chief executives and bankers” and I ask. Could the bonuses of bankers have been as high as they were if bank capital has been required to be as much as it used to be pre-risk weighting days? No way!

And so instead of labour and capital struggling against each other, perhaps they should discuss what to do with the intermediaries… whether these are executives, regulators or politicians.

I mean, do not those who receive low salaries have a lot in common with those who receive low interest rates on their savings?

Did the baby-boomers’ parents’ not take risks, or use reverse mortgages in order to extract everything for themselves?

Sir, Janan Ganesh writes “Bad luck, not policy, is the scourge of the young” January 7. What is this? I’ve seen a photo of him in FT, and so is he here just working for the baby-boomer establishment?

Of course “There is no law of the universe that says each generation most be more prosperous than the last”, but that should not diminish one iota the moral obligation of each generation from trying that to be so.

Currently grey-haired bank regulators base the capital requirement for banks which should take care of the unexpected losses, on the perceptions of expected losses. And with that they have introduced a distortion that guarantees banks will finance mostly what is perceived “safer”, like the known past, and keep out from what is perceived “risky”, like the future.

And does that mean that the young will at least inherit a safer banking sector? Of course not! The risk-weights which determine the capital requirements are portfolio invariant. That means these do not take account of the added risks of asset concentrations, or the dissipation of risks by means of asset diversification. And that means that the risk of the banking system might be increasing exponentially, even while it is being reported as safer.

Yes “Baby boomers enjoyed almost miraculously circumstances” but, to attribute that to luck and not to the daring risk-taking of previous generations is ungrateful, to say the least.

Just look at the financial products offered to baby-boomers. “Reverse mortgages” which allow parents to extract all equity possible from their houses, for their own consumption, and thereby leaving much less for their heirs. Did the baby-boomers’ parents do such things?

If the young would only look up from their virtual world, and react to what is happening in reality, then Paris of May 1968 might just seem in comparison to have been just another hip peaceful gathering of premature baby-boomers.

PS. There is not a day in which I do not thank all my antecessors for all their risk-taking, and not a day I do not fret I am not capable of taking enough risks for my successors.

God make us daring!

The quality of its unemployed is also vital for the strength of a nation

Sir, Janan Ganesh refers to the relative political tranquility that has prevailed in Britain over the last years, even in the face of 21 percent unemployment among young people, and other hardships resulting from the current crisis/recession, “The British have met crisis with understatement”, November 19.

That is of course extremely valuable and commendable, as long as it is of course much more the result of stiff upper lips, than of a feeling of resignation or sheer apathy, especially in coming generations.

In June 2012 in an Op-Ed I wrote “The power of a nation, and the productivity of its economy, which so far has depended primarily on the quality of its employees may, in the future, also depend on the quality of its unemployed, at least in the sense of these not interrupting those working.”

FT, do not silence the fact that for our youth to find jobs, banks must return to risking it with “the risky”

Sir, in “Struggling youth” you refuse to even mention what I know is one of the most fundamental causes why our youth is struggling to find jobs, and about which I have written you some hundreds of letters.

And so here we go again: Regulations which allow banks to hold much less capital for exposures considered “absolutely safe” than for exposures considered “risky” translates directly into banks earning a much higher expected risk adjusted return on the “absolutely safe” exposures than on the “risky” exposures. And that as you should be able to understand discriminates directly the access to bank credit of all those small and medium businesses and entrepreneurs who can provide our youth with jobs.

As is, all our banks are going to end up gasping for oxygen on some stupidly overpopulated ex-absolutely-safe beach… and that is not how jobs are created.

For the sake of our youth, swallow your silly pride and don´t silence this.

PS. The truth about how incredibly wrong current bank regulations will come out sooner or later and then FT´s silence on it, will shame it. I invite you to for instance take a look here on page 21-24 http://www.scribd.com/doc/149858219/Journal-of-Regulation-Risk-North-Asia-Volume-V-Issue-II-Summer-2013

And Anat Admati and Martin Hellwig have also in "The Banker's New Clothes" written the following about risk-weighted assets:

“The risk-weighting approach gives the impression of being scientific”.

“The risk-weighting approach is extremely complex and has many unintended consequences that harm the financial system. It allows banks to reduce their equity by concentrating on investments that the regulations treats as safe.”

“The official approach to the regulation of bank equity, enshrined in the different Basel agreements is unsatisfactory… the complex attempts in this regulation to fine tune-equity requirements – for example, by relying on risk measurements and weights- are deeply flawed and create many distortions, among them a bias against traditional business lending.”

And recently in “The Parade of the Bankers’ New Clothes Continues: 23 Flawed Claims Debunked”, “the studies that support the Basel III proposals are based on flawed models and their quantitative results are meaningless. For example, they assume that the required return on equity is independent of risk”.

The pillar of Basel bank regulations being based on “flawed models” and “meaningless results” and FT is silence on this? Amazing! That on its own is worth a book.

Europe, specially its unemployed youth, is ignoring how bad their bank regulations are.

Sir, Wolfgang Münchau’s “Europe is ignoring the true scale of bank losses”, June 24, tells us European bankers and bank regulators are lying to Europeans, and, next to it Enrico Letta begs “Europe must act to end the scourge of youth joblessness". Might those issues not be connected, in the sense that not pruning the old, stops what could be the new from growing?

There is no real harm in someone private having a fake Vermeer hanging in the living room and thinking it is an original, and being congratulated for it by all his friends, but, false banks?

As I see it, if the youth of Europe is to have a chance, banks need to get reset as urgently as possible… and that means cleaning them up, a lot of new bank capital and, foremost, new regulations. Start by throwing Basel out the window.

And I say that because current bank regulations, obnoxiously favors what is officially considered “absolutely safe”, and thereby discriminates against the risky, like all unrated businesses and entrepreneurs, and thereby stand no chance of helping to allocate efficiently the resources needed in order to help create the new generation of jobs.

The challenges of the “We have nothing to do” and of the society as a changing habitat.

Sir, you title the article on the current riots in the suburbs of Stockholm as “The challenges of the Swedish model” May 27. Although that is quite understandable perhaps a “Not even the Swedish model gets away” would have been more appropriate, since what is happening in Sweden is perhaps foremost a reflection of the growing unemployment of youth.

This is really nothing new in Sweden. In 1965 in the middle of Stockholm there were thousands of youngsters (I was not there) rioting for days and causing damages… and the basic explanation heard was that of “We have nothing to do”. 

And in this respect, given the possibilities of prolonged large unemployment, I have often argued that the well being of nations might come to depend more on the capacity of the unemployed to deal with their reality in a constructive way, that on what the employed are capable to do. 

That said there is no way to avoid the fact that whether we like it or not, current rioting in many places also closely correlate with immigration problems and the de-facto creation of immigrant ghettos which result even though no one wishes that to happen. Especially disturbing in Sweden is that during some of the car burning, some religious slogans were overheard.

A society is more than a piece of land, it is a delicate habitat. It thrives on the slow introduction of new species, but it can also fall apart if too many new species are introduced too fast and cannot adapt, without destroying too many of the previously existing ones.

I did not take Simon Kuper for a baby-boomer.

Sir, I have admired many of Simon Kuper articles, and there is no doubt he is a rising star that could help to rejuvenate your paper. That said his “Smile if you live in Europe” May 4, left me a bit surprised, as I did not take him for a baby-boomer content with being able to obtain a certainly splendid caffé macchiato at a very good price.

I say that because when you are young, more than where you find yourself, is where you are heading that matters… and Europe, for the time being at least, is heading down, down, down.

And as I have explained to you Sir some couple of hundred times, that is much a result of silly bank regulations which allow banks to obtain a much larger expected returns on their equity when lending to The Infallible than when lending to The Risky.

And as you must certainly be aware of, the value of any portfolio which does not include a hefty dose of risk-taking, is destined to wither away, and therefore, although quite appropriate for oldies with few years left of living according to actuarial tables, is something highly inappropriate for the young. 

In fact had a certified financial advisor proposed a portfolio to a young person with the ingredients regulators establish for their banks, he would have his certification immediately removed. So no, if in Europe, and if young, don´t smile but kick out the current batch of bank regulators… as fast as you can.

European youth is still unaware of how bank regulators block so much of their future.

Sir, Gillian Tett in “FISH becomes the European conundrum of US investors” February 15, refers to “a longer term sense of deep unease about the fundamental growth story, not just in the periphery of Europe, but in the core of eurozone too.”

And of course there are reasons to be much concerned. If bank regulators are allowed to stupidly clog the arteries of the financial system, and so that “The Risky”, those actors who operate on the margins of the real economy find it more difficult than usual to access to bank credit, the economy will stall and fall.

Lending to “The Infallible”, fiscal stimulus, quantitative easing or similar, are all great to make the economy grow, but that growth is based on fats and carbs and, in the absence of “The Risky”, those who provide the proteins,it will only lead to a flabbier and ever weaker economy.

Some colleagues of Gillian Tett will surely some decades from now pose the question: How come the western civilization suddenly became so panicky risk adverse so as to accept regulations which though it might give it a couple of more years of marginal growth, definitely doomed it to shrink away? How come this was not even discussed by the media?

I think they will find their answers in the prevailing dominance of a baby boomer generation flying irresponsible après nous le deluge colors.

Sincerely if the millions of unemployed European youth really came to know about the stupidity that is blocking so much of their future, I would not like to be in a bank regulators shoes, or in the shoes of those hushing it all up for that matter.

“L’economia castrata”