Let’s call on the Ghosts of Economies Past, Present and Yet To Come, to illuminate our central banks and regulators.

Sir, Tim Harford showing good Christmas spirit praises both the miser deflationist and the spending inflationist. “In praise of Ebenezer Scrooge”, December 18.

Harford writes: “In a deep recession, one might be concerned that Scrooge was failing to support aggregate demand but in normal economic times the effect of his skinflintery was to ensure that everyone else was able to enjoy a little more.”

Does Harford mean by that that the messaging by the three Ghosts of Christmas needs to be harmonized with central bankers? I ask because I am not really sure central bankers have enough of an intelligent Christmas spirit to be able to cooperate.

For instance, with respect to bank regulations, by agreeing with that banks should be able to leverage more when lending to the “safe” than when lending to the “risky”, central banks don’t mind that the risk adjusted net margins paid by the safe, are worth much more than those same margins paid by the risky. I am absolutely sure Ebenezer Scrooge would never discriminate like that, he would always lend to whoever paid him the highest exorbitant credit risk adjusted rate, no matter who paid it.

Perhaps we need to invoke the Ghosts of Economies Past, Present and Future in order to enlighten our bank regulators that good economies are never ever the result of credit risk aversion since they always come as a result of embracing risk. Hopefully the risks taken by banks are based on reasoned audacity. But, even if that’s not the case, and some banks fail, it is still much better when bankers dare jump and finance the risky future, and do not stay in bed, like now, just refinancing the safer past… developing constipation, bedsores, weak bones and muscles and other illnesses, like that which produces a chronic lack of job for our young (and old).

Finally Harford does well reminding central bankers who think the economy will respond to their ultra-low interest rates and QEs, that Scrooge, when finally embracing the Christmas spirit, “didn’t waste his money on demonstrative extravagances for people whose desires he didn’t really understand.

@PerKurowski ©

After banks have placed assets on their balance sheets, they are de-facto “after the curve”

Sir, Gillian Tett with respect to the difficulties posed by a possible drop in the oil price write that “now [regulators] are keen to show they have learnt the right lessons from last decade’s crisis — by getting ahead of the curve and forcing banks to be tough”, “The tangle of loose lending to tight oil” October 16.

Getting ahead of what curve? In the case of bankers after they have placed the asset on their book they are already de facto after any curve that is going to be thrown at them.

What is it with these statists? They abhor fiscal austerity and they love lots of QEs and minimal interest rates, but they do instruct banks to be austere… and regulators have many adoring fans cheering them on.

Why do regulators require banks to act be pro-cyclical and not counter-cyclical? If when oil were over $100 per barrel, banks would have stopped putting oil related loans on their balance sheets… that would have meant, quite correctly, “getting ahead of the curve”.

When will regulators learn… or it is just so that they just refuse to learn? 

PS. How long will we have to live with dumb regulators who make banks clear for ex ante perceived credit risk in their capital... when that is about the only risk banks have already cleared for, with interest rates and amounts of exposures? 

@PerKurowski ©

The reason why banks “dance around tough capital rules” is that regulators play the music that invites them to do so.

Sir, I refer to Gillian Tett writing about hedge funds and banks moving into the P2P sector, “The sharing economy is a playground for Wall Street” September 25.

Ms. Tett writes: “banks used structured investment vehicles and collateralised debt… to dance around tough capital rules”.

That ignores that the reason why banks can “dance around tough capital rules” is that there are different capital rules. If for instance banks needed to hold for instance the basic Basel II capital requirement of 8 percent against all assets, there simply would be no music to dance to.

And Ms. Tett writes: “the system needs to provide more credit to the economy, in order to boost growth… If you ask bankers why they are moving into P2P lending, some will point to the high returns they hope to earn (since the average loan commands an interest rate of around 13 per cent, margins are high).”

Does Ms. Tett really believe that loans at 13 percent, in an almost zero rate environment, will help boost growth?

And Ms. Tett writes: “if you think that the main goal of finance should be to create safe, clear rules for capital flows… then the arrival of banks and hedge funds [to P2P sector]… might make you weep”

Ms. Tett still does not understand what is going on. Risk weighted capital requirements give banks the incentive of being able to leverage their equity immensely when lending to those perceived safe; and which forces the “risky” to have to pay both a bankers’ risk premium and a regulator’s risk premium. The natural result is banks will lend dangerously much to the safe and dangerously little to the risky… and that is what should make us weep.

And Ms. Tett writes: “[Banks] also took advantage of cracks in regulatory structures to create products that policymakers could not easily monitor or control (it was unclear, for instance, who was supposed to oversee mortgage derivatives).” 

What cracks? Basel II clearly spelled out that if a security was monitored by one of the few credit rating agencies, and obtained an AAA rating, then the banks could leverage 62.5 times to 1 their equity. 

And Ms. Tett writes: “unlike the pension funds which were exposed to mortgage-backed securities in 2006, for example, the banks and hedge funds understand the dangers of credit losses.”

I am not sure I would agree with that assessment. Too many banks, especially European had no understanding at all of the dangerous amounts of credit losses that could happen if the demand for mortgages to be packaged in securities, exceeded by much the capacity to rationally finance the purchase of houses.

Sir, since January 2007 I have written you around 150 letters in reference to articles by Ms. Tett; and of course copied her. Most of them have to do with explaining why credit-risk weighted capital requirements for a bank is such a flawed and dangerous concept. Even if I assume she has not read one single of those letters, she should have learned more about it after so many years.

Ms. Tett as the expert in anthropology you are: What would have happened with humans had some Basel Committee nannies given them so much incentives to stay safe in their caves and not venture out into the risky world? May I advance the possibility they would have ended up extinguished in their safe caves?

Per Kurowski

@PerKurowski

Fed, before lowering interests, tear down the Basel wall that keeps “risky” from having fair access to bank credit

Sir, George Magnus discussing the increase of interest rates writes: “If the Fed continued with financial market stability as the leitmotif of policymaking, a later more disruptive policy adjustment and greater instability are the all too likely outcomes” “Fed should start making clear it faces difficult trade-offs” September 22.

I agree but before thinking of increasing rates, the Fed must make certain it tears down the regulatory Basel Committee wall that is keeping SMEs and entrepreneurs from gaining fair access to bank credit. The zero rates the Fed and other have been experimenting with the last seven years have not been able to reach the risky because of credit-risk weighted capital requirements. To increase interest rates, before eliminating this Maginot line built by the Basel Committee so stupidly where the passing was already difficult, would really be to leverage the difficulties of the real economy even more.

And it is all really about picking some low hanging fruit because, though some individual banks might have suffered, never ever has a major bank crisis been caused by excessive exposures to what is perceived as risky.

Few can inject so much vitality into a sagging economy as the tough we need to get going when the going gets tough, like the SMEs and entrepreneurs. And so therefore, if I was the Fed, I would immediately make sure that banks were not obliged to hold one cent more of capital than what they already hold against all assets, if they lend to risky SMEs and entrepreneurs.

The zero rates the Fed and other have been experimenting with the last seven years have not been able to reach those perceived as risky. To increase interest rates before eliminating any silly regulatory barrier, amounts to an assassination.

@PerKurowski

Never have so few central bank and regulatory technocrats done so much damage with pseudoscientific mumbo jumbo.

Sir, James Grant writes: “We live in an age of pseudoscience. The central banks’ forecasting models have failed to predict the future. Quantitative easing and zero per cent interest rates — policy centrepieces of the post-2008 era — have failed to restore what we used to call prosperity.” “Magical thinking divorces markets from reality" July 21.

Absolutely, but that pseudoscience has its roots in other even worse mumbo jumbo, namely the Basel Accord’s credit risk weighted capital requirements for banks.

With these requirements silly regulatory experts thought they could make banks safer, by allowing these to leverage more their equity for what is ex ante perceived as safe than for what is perceived as risky… as if those perceptions were not already cleared for by other means.

That distorted the allocation of bank credit to the real economy… and sent banks to build up against very little capital, huge exposures to what is ex-ante perceived as safe, precisely the material of which major bank crises are made of… and stopped the banks from lending to those most in need of bank credit like SMEs and entrepreneurs.

The quantitative easing and the zero interest could even have been somewhat effective, had only Basel’s regulatory distortions been removed. Unfortunately that would have made it necessary to admit what was done wrong, and since it is basically the same little group of members in a mutual admiration club that are responsible for both QEs zero interests and bank regulations, we can’t have that… can we?

History will be clear about that never before have some so few technocrats done so much damage. And history will of course not be kind to those who having been informed about it, like FT, nevertheless decided to keep mum.

@PerKurowski