A flat tax is what a flat world needs!

Sir much as I wholeheartedly agree with the intentions that John Christensen and David Spencer express in their "Stop this timidity in ending tax haven abuse" March 4, and that establishing a network of bilateral tax agreements will not be sufficient to solve the problem of world wide tax evasion, I do not believe that what they propose in terms of shifting the focus "towards the infrastructure of cross-border economic crime, including accountants, lawyers and financial institutions" will cut it either. On the contrary we could just be opening up new growth opportunities for those many illegal and illicit organizations that thrive so much on all our prohibitions.

What I would suggest is to go instead for a real worldwide tax transparency by making all countries sign up on an easy to understand world wide flat tax. This would help to remove the incentives to geographically arbitrate taxes and that keeps so many accountants, lawyers and financial institutions in the business "legal and intelligent tax avoidance"; and that keeps so many governments from not knowing whether they are giving true and needed tax incentives to attract investments or just being taken for a ride.

In all, a flat tax is precisely what a flat world needs; and by the way, just in case, a flat tax can be construed as a progressive tax too.

A crash capital replenishment is bad for the banks

Sir let us suppose you have gone to your doctor for regular checkups and because his balance had broken down you never discovered something was very wrong and as a result you had become seriously obese. What would you say if the doctor when discovering his mistake sends you on a crash diet, even though that could be life threatening?

This is exactly what is happening in the financial sector when the banks, after it was discovered that the credit rating agencies that were imposed on the banks by the regulators got it all wrong, and they are now ordered to replenish their capital… immediately… while the conditions are as adverse they can be. Who on earth could benefit from this? Only those who shorted the banks.

A rational doctor would work out a medium or long term plan for a diet and a rational bank regulator would give the banks ample time to come up with new capital.

And by the way, for the record, I do not own a single bank share.

PS. We normally know if a weight is lying to us…but how we love it for that!

Nothing but BIG!

Sir February 29 David Wright0n reports that AIG announced “almost $15bn of writedowns and losses related to subprime mortgage exposures” but that according to Martin Sullivan, the chief executive, “AIG had the ability to absorb the current volatility while committing the resources to grow and take advantage of the opportunities”.

Sir I must admit to feeling frightened by these expressions of nothing but sheer bigness.

Don’t just blame Basel II, Basel I where it started is also to blame

Sir Harold Benink and George Kaufman wrote that “Turmoil reveals the inadequacy of Basel II” February 28 and I disagree. Basel II has not even been fully implemented yet and what the turmoil really reveals is that Basel I is also inadequate.

Among other Benink and Kaufman recommends more discipline in the oversight by the markets but mention as a problem the lack of incentives for professional investors to use information in an optimal way. Of course they are right. What is the sustainable incentive in a system that no matter what the bank could think of a credit it is still the credit rating agency that calls the shots? The way out of this conundrum that I have been proposing for quite a while now is to include the minimum capital requirements calculated as current with the help of the credit rating agencies as a footnote and impose on the banks a minimum percentage of capital to assets requirement, for instance 8 percent.

Doing so would free us not only from the regulatory arbitrage that has stimulated banks to hide risks in other places but also from that systemic risk produced by the credit rating agencies and that has entities like the monolines sweating out ways of how to respond to crazy ultimatums type “you got five days to find capital or I downgrade you and you’re history”, something especially painful considering that if the credit rating agencies had done their job correctly in the first place the monolines would never have been in their current predicament.

PS. Update December 2012. When I wrote this comment I was not aware of how much of Basel II had been implemented in Europe and I had also since 1997 been expressing concerns about Basel I. 

Sovereign funds are not really that sovereign

Sir John Kay when arguing “Sovereign wealth investment is a force for stability” February 27 says “the lesson of history is that the problems are for the investor not the investee” and that “Investments across borders binds us together by creating actors with much to lose from political tension”. Both arguments clearly point to the fact that when push comes to shove, once committed to an investment, sovereign wealth funds are not really that sovereign.

These days the International Monetary Fund is drafting good conduct rules for the Sovereign Wealth Funds. I wonder if they should take the opportunity to include some good conduct rules about how the countries receiving the investments should behave… or would that infringe too much on someone’s sovereignty? There are arbitrage procedures to settle investor against country dispute but, do these apply in country against country cases?

The bank regulatory system risks turning itself into a Polish cavalry

Sir it is when Martin Wolf expresses concern over how the financial system works that he really makes it clear “Why Washington’s rescue cannot end the crisis story” February 27.

This is no ordinary crisis that requires an ordinary cavalry led by a John Wayne to rescue some poor pioneers from being scalped by the Indians. No, this is a much more serious affair that starts with having to question some of Wayne’s adjutants, the credit rating agencies, about their role in seducing capital inflows from foreigners to a non-existent El Dorado, by telling stories about great ratings around the world’s market-fires.

And so, to really end this crisis we need to revise the overall fundaments of the current regulatory system because if not, next time, our valiant John Wayne could end up commandeering something like the last charge of the polish cavalry against enemies much more dangerous than some yelling Sioux.

They have not even imagined how right they are

Sir having for more than thirty years argued about the dangers for the bathtubs of a small economies to lie completely open next to the global financial oceans exposed to their tsunamis I could not but fully agree with the general direction of Dani Rodrik’s and Arvind Subramanian’s “Why we need to curb global flows of capital” February 26.

Having said that I would much rather use the term “slow” than “curb” because it is the speed of how the financial resources move that causes the most damages.

But let me put forward a much more important comment. When the authors say that one should not be “too optimistic about the potential of prudential regulation to stem excessive risk-taking” they are more right than they have imagined in their wildest dreams or wildest hypothesis. In fact, it was precisely the running away from the risks, forced upon the financial market by the regulators through their minimum capital requirements for the banks and that was based exclusively on risk-assessments carried out by the regulator’s own outsourced risk overseers, the credit rating agencies that set us up to all what is currently happening.

Help the subprime´s go prime

Sir for a holder of a house mortgage the worth of it depends on the credit-worthiness of the debtor. For instance a thousand dollars paid each month servicing a mortgage during 15 years, when discounted at 11 percent per year, because the borrower is deemed “risky”, is worth only 88.000 dollars today, but exactly the same monthly one thousand dollars when discounted at only 6 percent because the borrower is deemed creditworthy, is worth 118.500…35 percent more! Herein lies one of the real problems of the subprime debtors… not only do they have less money but the little money they have is also worth less.

Lawrence Summers in “America needs a way to stem foreclosures”, February 25 speaks about the need for the creditor, when they “accept a write-down in the value to their claims, to retain an interest in the future appreciation if the homes on which they have mortgages”. This might be correct from an economist’s long term point of view but unfortunately bears little or no relevance to our mark-to-market accounting rules that do not look at future house values. Instead, was the creditor, when accepting a write-down, to obtain an additional guarantee that improves the rating of the mortgage, then the creditor could immediately cash in this on his balance sheet.

It is amazing how little money up-front can go a long way solving long term problems. If you want to go down memory lane, a similar principle was used behind the “Brady bonds” issued in the 80s to help developing countries manage their debts. Is it not time for some similar creativity to help your own citizens?

Sorry music industry, the ball is completely in your park

Sir in “The ISP police” February 23 it is when you say “The music industry meanwhile, must help itself and offer cheap, accessible downloads to expand the legal online market” that you get to the inescapable truth about the piracy of music at the internet.

For bad and for worse, the internet signifies and immense technological breakthrough and that has the power of changing society even more than music, something which as a true music lover it pains me to say.

We can not therefore hold back the society from fully exploiting the potential of the internet just in order to accommodate to the collection of music copyrights; much less can we afford to criminalize the hundred of millions of persons that are de facto and de jure infringing on copy rights; much less can we afford to dedicate scarce resources in the pursuit of these crimes when there are so many worse threats calling for our attention; much less can we afford to create in the music market another booming market opportunity for the entrepreneurs of illegal activities.

And so, sorry music industry, the ball, or in this case the song, is completely in your park

Recognizing you don’t either have a clue is a good place to start

Sir in your “Dangerous animals in the banking zoo” February 23 you suggest that the banks need traders with trading mentality in order to supervise the traders. This might indeed help to reduce some operational risks but, unless you have managed to tame those supervising traders into non-trader bankers the question then becomes who will supervise them.

Exactly the same fundamental approach as you are suggesting led the regulators to appoint the credit rating agencies as the knowledgeable risk overseers and see how far that has taken us. The credit rating agencies have now become themselves our largest systemic risk creator running around correcting their mistakes, downgrading here and there and placing ultimatums like “raise your capital in 48 hours or I will downgrade you”.

No, why do we not try something of the old traditional sensible stuff like not getting involved in something we do not fully understand and place through the banks professionals with sufficient moral standing to admit to that fact when it is true.

Come to think about it why does not FT give a good example and spell out that it does not understand it at all either, before suggesting we dig ourselves deeper in a trading hole.

Sounds like a lot of butterfly wing flapping!

Sir Marc Chandler in his “This is the rainy day Japan’s reserves are meant for” February 22 suggests that Japan should give $242bn of their reserves to the Japanese so as to boost the internal demand. Great idea! Pity though that bringing home $242bn while the sun is not really shining on the US economy sounds a fraction more than a butterfly flapping its wings and will cause some other effects to the economy of the world.

The credit rating agencies are private public servants.

Sir Jean-Louis Beffa and Xavier Ragot in “The fall of a financial model” February 22, describe the “present standard model of financial capitalism” as “mainly based on the self-regulation of the financial sector, which alone assesses the risks produced by its financial innovations”. Sorry, in what world do they live?

Currently the most important risk assessments are not provided internally by the financial sector but forced upon it by those outsourced risk-measure government bureaucrats we all know as the credit rating agencies. The fact that these agents are private does not make them less public servants

Careful with the systemic risks of supremacy

Sir Gillian Tett is at her most insightful self when she recurs to the background in anthropology to analyze the financial sector as she does in “CDO buffs who schmooze could resolve a financial mess” February 22.

Now if only she drew more on that background when drawing her conclusions then all would be great, since as she goes into a trance of supremacy founded expectancies wishing for schmoozing geeks or geeky schmoozers, we start to shiver thinking of an even worse generation of systemic errors than those that the credit rating agents are already providing the financial sector. No, humanities best and only hope might be that geeks and schmoozers don’t fusion into one.

A proposal for a reasonable regulatory forbearance

Sir Martin Wolf in “America’s economy risks the mother of all meltdowns” February 20 quotes Nouriel Roubini mentioning as one of the reasons that the Fed finds it so hard to head the danger off is that “regulators cannot find a good middle way between transparency over losses and regulatory forbearance”. I do not agree. It might not be perfect but a good way to start doing that would be to give the banks a longer time to adjust their capital requirements to the down ratings produced by the credit rating agencies on credits that should never have received good credit ratings to begin with.

I mean what is the need to compound the misery of the banks by forcing them to raise new capital immediately? To do so amounts almost to extortion that could only cause banks having to raise unnecessary expensive capital; which would do no one but some vultures any good. It is like the doctor suddenly informing a person that he has gained hundred pounds over the last two years and forcing him to shed that weight before next Tuesday. A scalpel?

If I were a bank president I would be raving mad with the regulators. First they tell me I have to raise capital in accordance with what their outsourced credit rating agents tell me and then when these go madly wrong they make me pay for it immediately.

Think tanks are also to be blamed for their lack of thinking

Sir Desmond Lachman from the American Enterprise Institute writes that “Greenspan will have to be called to account for regulatory failings and his interest rate policy” February 20. That might very well be so but others must also recognize their failings in the process. For instance not alerting to the abominable systemic risks that could be created by investing so much power over the financial markets into the hands of the credit rating agencies is more than proof that very little thinking occurred in the think tanks.

How the Financial Times got duped

If the Bank of England had decided to appoint some bureaucrat to rate credits for the purpose of deciding how much capital the banks needed to set aside in order to be allowed to give any credit I am sure the Financial Times would be up in arms screaming something about a bloody central planning. But by outsourcing these exact same functions to the private credit rating agencies, the central planners managed to dupe the Financial Times into believing that this was indeed the voice of the market.

In the letter from Michael Djordjevich “The lessons of the sad demise of bond insurance” February 19, we read “Rating agencies that held the key to the future of this industry accepted this concept of intertwining two basically incompatible risks”. I wonder what it will take for a Financial Times to realize that a bureaucrat is still a bureaucrat and a human is still a human prone to human error no matter if he is in public or private employment.

Sir, please help us to get the central planning monopolies that the outsourced credit rating agencies really are out of the financial world. In just a few years the credit rating agencies have managed to turn themselves into one of the biggest systemic risk the world faces.

FT should take care not to become a pink pamphlet

Sir with Ingram Pinn’s caricature “Olympic Spirit” February 16, which could easily have appeared in an extremist pamphlet, FT has let us down.

To even imply that the US qualifies to compete in the world league of torture (in this case waterboard) is to completely lose the perspective and play right into the hands of those foes of the US and of the rest of us who would love that to be so. I do fear this “without favour” of yours!

Assign to the diasporas a chair at the World Bank

Sir Michael Fullilove in “The world must adapt to diasporas” February 15, holds out that the “world would profit from developing an understanding…of diasporas issues” and I could not agree more.

As a former Executive Director at the World Bank (2002-2004) I believe that instead of wasting our time reshuffling the votes among geographically bound my-own-backyard interests, we need to assign one of the chairs at the board of the World Bank to the working emigrants community (and another one to the multinationals).

In 2007 the emigrant workers of El Salvador remitted to their homeland 3.7 billion dollars which, if this amount represents fifteen percent of their earnings means that their gross income was around 24.7 billion dollar. The official GDP of El Salvador, if we reduce it by the amount of the remittances, is then only 14.8 billion dollars. Now, you tell me ¿where is really El Salvador? Should not the Salvadorian diasporas have 50% of the seats on the Legislative Assembly of El Salvador?

Doing the same operation as above for the whole world we calculated that the Gross Diaspora Product is greater than that of the GDP of India, perhaps even China’s, and so why should not the diasporas sit at the executive board of a World Bank in globalized times?

Does FT have a conflict of interest?

In your editorial “Subprime chains” February 13, when writing about the wrong incentives that led to the current crisis; even asking for “regulation that increases the average size and stability of brokers”, as if size of a brokerage firm has anything to do with the accumulated stability of a market (if anything the contrary), you do not even mention the fact that had it not been for the good ratings given to the subprime mortgages backed securities by the credit rating agencies neither banks or brokers would have had neither the tools or the incentives to create any subprime mortgage mess.

I know that McGraw-Hill owns Standard & Poor’s. Does FT have a similar conflict of interest that could cloud its “Without fear and without doubt” with relation to the credit rating agencies?

An explanation yes, but not an excuse for the cowards

Sir John Kay is right when in “Bankers, like gangs, just get carried away” February 13, he puts the bank bosses role in perspective by arguing that “the gang leader, despite his apparently unquestioned authority, is frequently the prisoner of the gang members.” This applies to so many different realities, like one could currently even say that a hugo chávez is a prisoner of the hugo chávez gang. Let us remember though that this could serve as an explanation but never as an excuse.

The fact that it might be easier to pinpoint guilt on a Jérome Kerviel does not really mean that he is more guilty that all his superiors who delve in matters that are much harder to understand; since the not understanding a iota but not being man enough to be able to say so is what mostly lies behind this current financial turmoil.

FT seems not to want to see the forest because of the trees.

Sir your editorial “Ratings reform” February 12 shows that you like others quite stubbornly do not really want see the forest because of the trees.

You write it is ”meaningless to say that the ratings agencies were wrong in hindsight – the question is whether they made responsible use of the data they had in 2006 or early 2007”. Hold it there! This is not a question of given points for performance or style in a high jump contest. The credit ratings were empowered by the regulators to impose on the market their criteria not because they were going to responsibly use any specific methodology but because they were supposed to be right! If they cannot be right...who cares about whether they act responsibly or not... we do not need them...in fact the more credible they are the more the dangers that we will follow them where we should not.

Yes I do blame the credit rating agencies, who should as a bare minimum inspected a sample of the subprime mortgages offered as a collateral to see if they even belonged to the same universe of data they had before taking them as a good guarantee, but, much more do I blame the regulators who empowered the credit rating agencies to begin with and thereby set us up to extremely dangerous systemic risks.

Stripe the credit rating agencies´ powers

Sir “Ratings agencies move to restore the credibility” by Saskia Scholtes, February 7 and “Rating agencies face struggle to make the grade” by Michael Mackenzie, February 9 are but two of thousand of articles that refer to how the credit rating agencies will try to make amend and become better.

Unfortunately, our real underlying structural problem goes into the complete opposite direction. The more the few we have empowered to tell us about where to go get better at it, the more likely we all are to follow them where we should not go.

Allow for credit rating agencies, they are useful, but please stripe them from their artificial powers.

Would shorting England be acceptable?

Sir Christopher Caldwell concludes his “Why Kerviel is so unsettling” February 9, saying “The problem is not the rise of the super-empowered individual. It is that the super-empowered individual tends more and more to be an amoral individual.” He is right of course but how did we get here?

We have currently a system that allows for the creation of all kinds of amoral vested interests…like making profits out of an increased mortgage default rate, something not much different from having allowed Englishman to short England and created a group of nationals with a transparent and legal vested interest in Hitler winning the war.

Also when Caldwell refers to “What is striking here is the contrast between the mediocrity of the trader and the scale of the catastrophe” this is really peanuts when compared to the contrast between the super-sophistication of the financial wizards and the credit rating experts and the scale of our current catastrophe.

Unsettling indeed is how we settle to focus on Kerviel as our convenient scapegoat. Hang Kerviel we’re innocent!

Installing fire detectors at the insurers against fire

Sir William Gross is most probably right in that “Rescuing monolines is not a long term solution” February 8, but it might be an expeditious short term approach to buy us some time to find a solution or at least lower the temperature of an overheated financial system.

That the whole issue is tremendously confusing there could be no doubt. It all sounds like having to help the insurance company that covers your home against the risk of fire, to pay for the installation of fire detectors in their offices, so that they do not burn up and leave you standing alone on your yet unburned but still at risk of a fire property.

Narrow banks just reflect narrow minds

Sir, as the confusion that reigns in the financial world grows more people will hang their hopes on the alternative of “Narrow banking” which by restricting some banks to hold only liquid and safe government bonds is supposed to provide us a super-duper safe bank.

Let me sincerely doubt that just because we already show so much faith in governments and politicians accepting their currency based on their implicit well behaviour we are to be much safer by depositing those funds back with the same governments and politicians.

In the current bank regulations that emanated from Basel little is spoken about the almost conspiratorial subsidies to public debt that have been created by requiring so little bank capital to be held against it and that thereby also signals that the public debt does not carry risks. With such behaviours how surprised should we be seeing the current levels of public debt growing and growing… until the true reality of risk catches up?

What happens to the environment is indeed a risk that finance ministers should talk more about

Sir the finance ministers from the US the UK and Japan speak with one voice when in “Financial bridge from dirty to clean” February 8, they say that without a global investment framework built on market incentives the global deployment of clean energy technologies is going to be very difficult but they also note that not doing so will be very risky for us all.

Well this is exactly the sort of real societal risks that were ignored by financial regulators when they designed the minimum capital requirements for banks based on a very narrow definition of risk namely that of a default. If a default occurs because someone was trying to help the planet it would seem like something more acceptable to the society if there were no default but the bank was financing the purchase of a new car that will produce more carbon.

It is not that I am saying that banks should take stupid risks in environmental protection projects…but neither should finance ministers through their regulations create non-transparent subsidies for what just the credit rating agencies believe are low risk projects while ignoring all other risks faced by humanity.

If a bank lends a AAA corporate client a 100 dollars the bank need 1.6 dollars in capital if it lends to riskier below BB- reacted environmental project the bank needs 12 dollars in capital. Is this what the minister’s mean with market incentives?

Basel II just keeps digging the hole of Basel I

Sir, Charles Freeland a Former Deputy Secretary-General of the Basel Committee on Banking Supervision considers “Basel II a big improvement on outdated model” February 7, and the outdated model he refers to is Basel I which has been in place for only about ten years.

I do not think it of Basel II as an improvement but jut as a further digging ourselves into a very dangerous hole. Now, instead of going back to the freedom of the markets, besides keeping on using the outsourced bureaucrats of the credit rating agencies to measure risk (Basel I) we are with Basel II also allowing some big banks to do their own internal risk modelling, and this even when we have recently witnessed how much intrinsic risk these models create by themselves and how bad they can really be. This is all plain crazy!

I would much prefer setting an 8 percent minimum capital requirement on all the credits (including those to the public sector) and assist the market producing the information it needs to take it from there.

And, just to make certain we do not put all the eggs in the same basket, I would start thinking about a progressive tax on the size of the banks. “The bigger you are the more it will hurt if you fall on me and so the higher must the insurance premium I charge you be”

But why should we keep the financial sector caged?

Sir Martin Wolf explaining “Why it is so hard to keep the financial sector caged” February 6, gives us ground to ask… are we supposed to cage the financial sector?

Besides offering a safe passage for our savings is not the financial sector also there to assist the society in the generation of decent jobs and the distribution of opportunities?

We have for soon two decades been led by the bank regulators into a risk-adverse frame of mind that carries with it significant other risks.

I hold that instead of minimizing risks, which one could do at least on paper by not taking any risks; and instead of focusing only on the possible crisis event, we need a much more holistic view and that at least starts by measuring the full results of the boom-bust cycle to see if, on the whole, it was worthwhile for the society at large, and most specially for future generations.

The Financial Times has teamed up with the International Finance Corporation (IFC) which is part of the World Bank Group to offer "The Sustainable Bank of the Year Award” and where it recognizes "the bank that has shown excellence in creating environmental, social and financial value across its operations." It is a great idea but why not take that opportunity to reflect upon that none of those worthy goals receive any incentive from the regulator, who's only concern in life is lessening the risks.

Not to risk anything for nothing is much worse than to risk all for something. Let us never forget that risk is the oxygen of development and that “No woman no cry” was not written for us to stop crying.

The irony of it all is that the regulator in all their risk/adverseness also created those new sources of systemic risks that have acted as detonator for our current turmoil; namely the empowerment of the credit rating agencies as their outsourced bureaucrats in charge of measuring the risks; and whom the markets blindly followed into subprime quick-sand laden swamps.

Harmonizing also carries its risk

Sir Francisco González is most probably a great banker and I suppose he can tell us a lot of “What banks can learn from this credit crisis” February 5. Unfortunately both he, as a banker, and just as the regulators are, find themselves to close to the trees to see the full forest.

For instance when Gonzalez speaks in favour of more harmonization it sounds oh so sweet, but I shiver, because history has told us that humans run almost the same risks of harmonizing around good ideas than around bad; and so the expected result of it all is less volatility…until a very big bang. Exactly the same way we got into our current mess…credit rating agencies were doing well, we left down our guard, and to the floor we went, knocked down with some really crazy prime rated subprime mortgages.

As I see it the only financial regulations that really works is to install the continuous questioning of it all, and to but your eggs in as many baskets as possible; even though a Mr González running a super-basket may not particularly like it.

González consoles us with “the good news is that the crisis has exploded during a phase of robust global economic growth and before it could produce long-lasting damage”. Yes, let us all pray that he is indeed right, but never without forgetting that this could just as easily have happened under much more dire circumstances.

Clarity about what?

Sir Michael Mackenzie and Stacy Marie Ishmael report that “Moody’s offers to change debt rating system” basically substituting a number up to 21 for their current letters, presumably to increase clarity. Clarity about what? Risks? In that case the more confusing the reporting system perhaps the less prone it is to transmit the sense of clarity and exactness that does not exist. In this the current system is more adequately confusing.

FT Sustainable Banking Awards

The Financial Times and IFC have teamed up to create the following competition.

"The Emerging Markets Sustainable Bank of the Year Award recognizes the emerging markets bank that has shown excellence in creating environmental, social and financial value across its operations."

Sounds great but, if creating environmental, social and financial value across its operation is as I gather the promoters believe a worthwhile goal, then why do they not ask the regulators to send clearer signals about it to the banks in the emerging nations.

From what we can observe the regulators are currently signalling minimum capital requirements based exclusively on the reduction of risks as perceived by those outsourced risk surveyors we know as the credit rating agencies.

But if you want to give incentives so as to obtain the results the promoters seem to wish, then you might be better of sending clearer signals than those of a competition. For instance why do you not set up minimum capital requirements based on the rating of environmental, social and financial value creation? And, if you do, why not throw in something about job creation too, which also seems something quite worthwhile for the banks to do.

That is if course unless all what is meant when referring to sustainable is solely the sustainability of the banks themselves.

Don’t blame Basel II, it’s Basel I that got us here!

Sir, you are publishing many letters, like for instance on February 4, that blame Basel II for our current financial turmoil. Not true. The genesis of it all lies squarely with the original Basel Accord and its first implementation, Basel I. That is when our regulators decided to enforce a system of minimum capital requirements on the banks and to empower the bureaucrats of the credit rating agencies as their outsourced risk surveyors.

The whole Basel affair is just another example of the dictatorship of information and knowledge that places all the decision in hands of specialists whom in this case, with the usual arrogance of specialists, thought they could control risk and completely ignored that there is nothing as risky as the risk you believe you have under control.

What do we learn from this all? The same old lesson! Listen to the experts but do not, under any circumstances, give them power to control it all, as that will, by virtue of incestuous degeneration, put in force uncontrollable and very dangerous forces.

Should we freeze the ratings too?

Sir Aline van Duyn in “Stakes in the ratings game are being rapidly raised” February 2, describes very well the consequences of our financial regulators having empowered financial Frankensteins to tell the world about where the risks were. How do we now rein them in?

Perhaps having thought about interest rate freezing it could also behove us to take a closer look at the freezing of ratings? I mean what useful purpose could it serve getting all the bad news simultaneously when we can’t really digest them rationally? Especially since they are in fact really old news since they should never have gotten their good ratings to begin.

And US, get yourselves some more helpers too!

Sir Ricardo Hausmann tells the US “Stop behaving as whiner of first resort”, January 31; do not give “the US consumer more rope with which to hang himself”. Hear hear!

But as Hausmann says not only should the US not bet all on finding a dream-adjustment like reducing the over-consumption in the US “in a way that does not hurt longer term growth” by looking at what others (China) could do for it; it also needs “to keep on growing”.

The US has to be careful that the reduction of consumption does not diminish its size, since it is not only a matter of getting back into equilibrium; it is also about being able to take care of the outstanding stock of debt. And so “Stop behaving as a whiner and get yourself some 40 million more working immigrants to help you out!” could also be a valid message.

I ask why industrial China should be able to use rural China for their growth and not North America Central America.

Congratulations Basel?

Sir Ira Sohn in” Without Basel II it could have been so much worse”, January 31, says "thanks in part, to the Basel II regulations... a global systemic failure was averted". Come on! Be real.

Haven’t the authorities of Basel done enough of self-congratulation over the years to enlist what can only be explained as a spin doctor or a silly fan, and even managing to enlist FT in that?

Of course it is good that banks should take account of the pillar number 2 of Basel II that has to do with operational risks; especially since those rules should have been applied without any Basel regulation; and especially since more operational care might have even been retarded by the regulator not including it in Basel I and forcing banks to focus on other things.

But, what about the other 2 pillars? Pillar 1, the minimum capital requirements based solely on risk as measured by the credit rating agencies, drove the bank risks into no man land with doubtful guides. Pillar 3, market transparency, sounds now only as a bad joke when no one in the market seems to be in a position to understand what on earth is going on.

A tsunami is riskier when in a bathtub

Sir, Robert Wade is absolutely right saying “Speed bumps needed to slow down capital flows” January 30. The biggest risk for the small bathtubs that the financial systems of the small countries represent, is not the drying up because for lack of water, but the drowning as a consequence of the tsunamis that the global financial oceans repeatedly generate.

Once again going alone!

Sir Martin Wolf’s warning that “Bernanke’s big gamble on reflation may work to well” January 30, is right on the dot in that the US should have first made certain that the rest of the world would collaborate before wandering off in the wilderness like a macho-do-it-yourself-cowboy.

Also for the US after so many years of liquidity injections I would prefer watering their identifiable problem sectors, like housing, with individual applications, micro-jet, instead of using a big hose, since before working sufficiently the land with that confidence building that allows it to absorb the water, the risks of flooding are large.

Authorized trading could be even worse than not authorized trading

Sir Frank Partnoy does quite well to remind us that for a shareholder a dollar lost is a dollar lost independent on whether it comes from an authorized trade or not, “Kerviel is just a part of a global rogue’s gallery”, January 28. In fact one could make the case that the huge losses on duly authorized but never really comprehended investments are much more worrying.

Come on what about that stiff upper lip?

Sir your “How to deal with sovereign wealth” January 28 reads like you are being very nervous about the sovereign wealth funds; asking for a code of conduct that would put order and limits on what these monsters could do to you. Come on what about that stiff uper lip?

Suppose these funds do not behave? Do you really think there would not be a market response to that? Would a Saudi Citibank or a Chinese Microsoft be able to keep the value of these companies in your markets if they are seen as having bad intentions?

This is a moment when the world really needs these capitals to recycle and help out and, if there is really anyone who would like to see a code-of-conduct it might very well be the investors who could want an assurance that your nationals will give them the most favoured investors status. By the way your editorial might very well have reduced in some billions the price they would be willing to pay for those assets they are thinking of buying.

Long live the Balkanization of criteria!

Sir "Davos call for end to fragmented financial regulation" is a first page story on you January 26 issue since Malcolm Knight the chief executive of the Bank for International Settlements complained about "the Balkanisation of regulation". Mr Knight might have a point, but, long before that discussion, we need to fully deal with the issue that the detonator for the current crisis was his institution's empowerment of some few credit rating agencies and their methodologies; and which resulted in giving the subprime-mortgages backed securities the wings to fly all over. From this perspective, a Balkanisation of criteria is also urgently called for. 

Yes of course, put some order in the house, nothing wrong with that, but, please, not by trusting some governess ordering your children telling around. Haven't you seen what monsters you have contracted? "Put up a couple of billions before next week or I down-rate you!" (Where is Maria?...The children need her!)

PS. In a statement delivered as an Executive Director at the World Bank on April 3, 2003 I wrote: "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."

FT should not lend support to the sophisticaters!

Sir in “The start of the great unwinding” January 26 you say “Complexity also adds to the dangers that any part of the hyper-financial system can bring down the whole” and you are right. Nonetheless, you follow it up by saying “Monoline insurers exemplify this kind of reef under the water” and this is clearly wrong; since having some undercapitalized insurers selling coverage while their good fortune last has nothing to do with complexity.

Many of us warned repeatedly about the counter-party risks with agents such as the monoline insurers and the reason it was hard to get that message heard was that it was so easy for them to find in their sleeves the sophistications that confused the issues and killed the debates. FT should not help the market to hide within the complexity in order to hide the simplicity, and perhaps a non-Davos retreat to reflect on what are the simple and time-honoured truths that lie behind the current turmoil could be a good place for you to start.

Any explanation?

Sir Sheila McNulty reports in “Profit at Conoco mask oil industry’s problems” January 24 why even with high oil prices international oil companies find themselves with limited access to resources and an unclear path for investment, and which obviously must impact the availability of oil around the world.

In reference to this may I ask why on earth have not the consumers and the oil producers been able to agree on long term supply/take up contracts based on a reasonable initial price; and slowly adjusted to the real markets by means of a running twenty-year average moving price? The governments could help out, acting as buffers, for instance by charging gasoline taxes also in accordance with the price stabilization scheme.

I truly do not understand why no government from an oil consuming country has not empowered some agents to go out in the market and negotiate on their behalf some decent terms on oil for its constituency; exactly the same way I cannot understand why the government from a producing country has not gone out there to negotiate some of the stability that their economy and constituency need.

Clearly the incentives of having long term contracts at reasonable and stable prices would help the much needed investments in oil exploration to take off.

Do not dig us deeper in the hole we’re in!

Sir, Ieke van den Burg when writing “We must have strengthened oversight of bank sector” January 23, seems to propose we dig ourselves deeper in the hole where in, when asking for the creation of “holistic” public oversight. That, just as the empowerment of the credit rating agencies meant will just increase the systemic risks of global failure.

As I see it the best way to go is to follow the tradition of not putting all your eggs in the same basket and therefore creating a progressive tax on the size of the banks. The larger the bank, the more it will hurt if it fails, so the more it should pay in insurance premiums.

Marx prophesied “a progressive diminution in the number of the capitalist magnates” and the best way I know of fighting Marxism is to stop this prophecy from becoming a reality.

At least let us guarantee some cyclicality in the bonuses!

Sir Prof Avinash D. Persaud in his letter “Bumper bank bonuses and banditry in the boom” suggests new regulatory capital requirements for the banks so as to get rid of a system that “adds to pro-cyclicality”. I could not agree more, especially since that would also help to reduce the “pro-cyclicality” produced by the credit rating agencies which is something I have been arguing since the Basel Accord started to be applied globally.

Though I also agree that the above is a much better way to take care of the salaries and bonuses of bankers than having regulators act directly on it, I would like to remind about the importance of fully restoring the powers of shareholders, in banking and in all other activities because as long as management have so much influence over their own bonuses there is not even cyclicality.

Who suckered who is the wrong debate

Sir George Soros writing about “The worst market crisis in 60 years” January 23, is right to say that resulting political tensions…may disrupt the global economy and plunge the world into recession or worse. Unfortunately he then adds coal to that fire when he speaks with venom about how “Globalization allowed the US to suck up the savings of the rest of the world”, knowing perfectly well this was mostly because of the immense reserve accumulations of dollars voluntarily made by governments, mostly to keep exchange rates artificially low in order to, in Soros phraseology, suck up jobs. Who suckered who is not the debate the world now needs.

That the US should have ignored the financing offers they received from the world and behaved with more discipline not one doubts, but neither would then other countries have been able to strengthen so much so that they now can perhaps take over some of the pulling responsibilities of a bit tired US economic locomotive. How that can best be done is what we should be debating.

If knowledge suffices then wisdom is worthless

If knowledge suffices then wisdom is worthless and sure enough our bank regulators placed more value on knowledge than on wisdom; which is the only way how you can explain such foolish behaviour as empowering the credit rating agencies with so much power over the financial flows of the world.

See where this has gotten us. All the very sub-prime awarded mortgages to borrowers that classified as subprime would have not been able to go anywhere had they not been blessed as prime collaterals for other securities.

One reason that stops the world from realizing the foolishness of it all is that the credit rating agencies are private, and we have all been pavloved into establishing a connection between private and free efficient markets. The truth though is that the private credit rating professionals are only outsourced bureaucrats working for some pompous Ministry of Financial Risk Elimination.

Cooperatives hit Wall Street?

Sir on the front page of your weekend issue January 19, the lead title says “Merrill to reform bonus system” and we read that they plan to “change the bank’s pay system so that it was ‛based more’ on how the whole company did; then on how the individual business did; then [on] how the individual did”

Will we perhaps soon hear Merrill suggesting all the companies they invest in to follow their cooperativistic movement lead; and also create a specialized hedge fund?

Could our economic weapons be slightly passé?

Sir Samuel Brittan’s “We have defences against a slump” January 18 reads like a brilliant general discussing what to do in the current war, with the weapons from the last war. Our problem now is that we have not yet been able to really identify the exact strain of the current economic hardship’s virus so as to know what could best work.

For instance, nothing of those reckless borrowing and reckless lending in the subprime mortgage sector would have gone anywhere had it not been for the credit rating agencies having been appointed as financial commissars by our bank regulators. Does this now mean we have to start by radically extirpating these agents from our system or do treatments suffice?

How do the French national hypocrisy reserves measure up nowadays?

Sir Philip Stephen in “Lovestruck Sarkozy gamble on reaching a happy ending” January 18, gets into the theme of “throwing overboard this ‛deplorable tradition of hypocrisy’ was refreshing”.

Given that national reserves of hypocrisy frequently are of immense values to solve problems or at least keep a lid on them to prevent them from exploding, it would be interesting to hear Stephens opinion on how these reserves of France stand up when compared to those of other nations.

It is not that I believe that hypocrisies have to be included on the balance sheet of a nation, but a special footnote on it, among contingent assets and liabilities, could be helpful in furthering our understanding of it.

Banks should not be allowed to turn into automated credit machines

Sir if the credit rating agencies were gubernatorial offices with bureaucrats instead of private companies I am certain many would be looking at them from a quite different perspective but the truth is they are their function is a regulatory one, to inform the markets where they can go and at what price.

John Dizard in “Time to see is established credit rating agencies make the grade January 15 tell us that we should count out the possibilities of going “back to a system where credit is dispensed by bank credit committees” as they “aren’t the people structures of capital available in the banking system to do that”. Well how sad, our banking system is the now only an automatic credit machine that follows what the piper says? Of course we have to get out of the current system…it is crazy… the horrendously badly awarded mortgages would not have gone anywhere had it not been for the prime ratings.

I am in no way predicating against the credit rating agencies, they have a role to fulfil and they should be able to compete favourably in the market of credit opinions, but what I am totally set against is bestowing them with so much power. Get rid of the system of calculating the minimum capital requirements for the banks based on risks as calculated by the agencies and you will immediately stimulate some of that credit analysis capacity that we would like to see in our banks.

Dizard and others spend time analyzing whether by changing the compensation structures of the credit rating agencies one could correct their current weaknesses. Of course that is always a good thing to do, but to think this would stop us from being led into even worse systemic risks, when thereby trusting even more those few empowered to tell us what to do, is just to blithely ignore all the lessons learned by mankind.

Martin Wolf did right opening the cage!

Sir who could have thought a year ago that we would read Martin Wolf say “Why regulators should intervene in bankers pay”, in the Financial Times, January 15, and agree that he has a valid point; that the system cannot stand to see many franchises of public confidence so savagely exploited by so few. Mind you, on a much different scale, that is exactly how we ended up turning over Venezuela into the hands of an instigator of hate.

Perhaps what we now need is a new layer of progressive taxes specially designed for those who earn more than 100 times the income per capita of the country. The argument seems also applicable to the area of intellectual property rights. When we the society agreed to award patents and invest money defending these so that new inventions would follow, we never did it in order to help the general managers of those patents to earn salaries like hedge funds managers or bankers.

But also what could be most needed, in this case for all, instead of new regulations, is to restore the power of the shareholders since as long as management can decide their own salaries, the market constraints have really not a chance to operate. There’s a fiction making its rounds in the world that the big salary checks are all well deserved and well earned. Who do you think put a spin on that theory?

Regulatory malpractice is not the same as laissez-faire

Sir Barney Frank the Democratic chairman of the House financial services committee argues “Why America needs a little less laissez-faire” January 14, and though he might be right on many points he would do well to also remember that our current financial turmoil-with-the-potential-of-chaos is in fact primarily the result of regulatory malpractice.

First, the minimum capital requirements based on differentiation of risks that were imposed on the banks by the regulators was the incentive for the banks to go from the originate and keep it on your balance to the current originate and distribute it to where it can’t be readily see mode.

Second, to believe that you could give some few credit rating agencies so much power without this sooner or later turning into the mother of all the systemic risks creation machine can only be explained with one word… naivety.Whether there were predatory subprime lenders or predatory subprime borrowers none of them would have gone anywhere had it no been for the credit rating agencies reinforcing the belief that risks are measurable and controllable.

And so, before we tackle and solve the above, the financial tsunamis will hit upon us time and time again.

Speaker’s Corner revisited

In 1872, the British Parliament decreed Speaker’s Corner in Hyde Park of London as a place reserved for free expression, and initially it attracted all those extremists who, although qualifying as nuts, still had the right to vent their opinions. Lately, we have all witnessed how the original Speaker’s Corner speakers moved into Speaker’s Studios and now radicalism, anarchy, or fundamentalism is voiced on prime-time television. All of us others considered as boring in-betweens, have now to settle gratefully for slots in after-midnight cable television, or Speaker’s Corner, (or FT when they published us).

Sir Cass Sunstein discusses the fundamental issue of “How the rise of the Daily Me threatens democracy” January 11, and he should be commended for it since indeed the most dangerous weapon for mass-self destruction in any society is divisiveness; as a columnist in Venezuela I should know; there I write in green but my readers can only read me in yellow or in blue.

The current sheer overload of information forces many to use a very simple though also very dangerous initial classification system that uses some basic common denominators. The one of these most recently used is of course Bush, and which has otherwise clear-minded people thinking: “Hugo Chavez speaks against Bush? Then he must be good!”

How do you fight it? The only way I know is by always pointing out the many shameful similarities of the extremes and trying to make life in the middle seem interesting, fun and chic. But, it still takes guts to swim in the middle of the river and not crawl up on an extreme safe shore!

Gold is but an insurance

Sir in “Gold is the new global currency”, January 8, you express hope that gold’s most bullish fans are proved wrong… but really, so do most of them. We all know that gold is one of those worthless things that can become extremely valuable just because other valuables become extremely worthless, and so we regard the increase of the gold price with the same enthusiasm we can have about someone collecting on our life insurance policy.

Just agents or champions of change?

Sir Gideon Rachman writing about “Obama´s message to the world” January 8, refers to John McCain’s support of the Iraq war and though this is indeed an important fact on its own, I believe that much more important is that this support is given knowing that it is not a popular stance; and the same could be said about his full support of the recent legislation package on immigration. Therefore, and not that I do not like Obama, I do, but McCain seems also to be a valid candidate for “change”.

Why do not those both these candidates team up and propose what the American economy could need the most, namely a hefty tax on gasoline/petrol consumption? That would propel them from being merely agents of change into real champions of change.

Don’t go overboard blaming the investment bankers

Sir, Prof Eric De Keuleneer sounds more than upset in his “Investment bankers have behaved like pyromaniac firemen” January 8. Of course many of them did wrong but, before he spits out more venom, and most especially before he suggests new and tighter regulations, he would do well to study how much the investment bankers have in fact only been responding to the current regulations. As I see it, in history of mankind, there have never been as stringent financial regulations as now, when everyone has basically been ordered by the regulator to follow the tune of the piper, the few credit rating agencies.

Take away some of the incentives for consumer lending

Sir, January 8, Stephen Roach argues that “America’s inflated asset price must fall” in order “to shift the mix of savings away from asset appreciation back to that supported by income generation” and which sounds desperately drastic when there are other means to do that.

Anyone who lives in the US and receives ten pre-approved credit card offers each week and still, six months into a crisis, has to answer five phone calls a day offering mortgages, must know that some other forces than asset prices must be driving debt creation.

Since so many seem capable to so easily switch from praising the US for being the locomotive of world growth to “being the main culprit behind the destabilizing global imbalances” let me at least point out what I think is also responsible for the current sad state of affairs.

The securitization of consumer debt which allowed the creation of low risk financial instruments, plus the introduction of the minimum capital requirements for the banks and which are exclusively based on risks, as perceived by the credit rating agencies, constituted a massive dose of incentives for the financial system to go after the consumers, in the US and everywhere. Taking away some of the incentives to offer unreasonable consumer credits might long term be a much wiser thing to do for a nation than having the price of their assets fall from the skies.

In the long term the credit revolution points to other problems too

Sir Wolfgang Münchau in “The credit revolution looks to the long term” January 7 looks for the bright side of our modern credit markets, which is something good. Doing so he brings forward the “subprime mortgage, a product that allows poor families without a credit record to finance a home”. Unfortunately even this might not be such a clear cut and run proposition.

It used to be that depending on his income, a potential home buyer could classify for more or less of borrowings, but the interest rate to be paid on the loan did not differ much between a “good” borrower and a “not so good” one. Not any longer. The current knowledge economy classifies the market in many more different types of credit risks, which of course causes more financial discrimination, for good and for bad.

A thousand dollars paid each month servicing a mortgage during 15 years, when discounted at 11 percent per year, because the borrower is deemed “risky”, is worth 88.000 dollars today. Exactly the same payments, discounted at only 6 percent because the borrower is deemed creditworthy, are worth 118.500…35 percent more! And here lies one of the real problems of the subprime debtors… not only do they have less money but the little money they have is also worth less.

Now add to the above that the credit ratings might not reflect correctly the repayment capacity of the borrowers and we can see how as a society could be drawn into an unsustainable structure.

There are carbon border taxes that do no sound that bad

Sir in the greening of globalization, January 4, you correctly speak out against carbon border taxes since these could be sheltering a new dangerous breed of protectionism. But, given that Europe and the world has to pay so much more for oil and has to see its environment so much more contaminated, just because the US does not want to restrain its consumption of gasoline/petrol perhaps a carbon border tax on US products that considers this would not be such a bad idea after all.

That business growth should not be an end in itself is a worthy end in itself

Sir Sir Samuel Brittan is of course right when he reminds us that “Business growth is not an end in itself” January 4. What more pleasant for all of us to be able to retire in a sort of economic production equilibrium to enjoy the “other” offerings of life? But, for that to happen, there are at least two things we must do.

First we have to work real hard on our current distribution machinery since before the needs of all your citizens are satisfied, which might include even those of the other poor in the world, you would not be able to relax enough if you always had to be looking over your shoulder to see if someone is taking advantage of your bliss to grow away from you.

Second you need to send much better economic signals on where you find yourself, as I at least would not want to get stuck on a level that requires me accompany my wife when she goes out shopping at 5 am in the morning in one of those strange sales that the US economy seems to require. For a start I have often suggested that instead of only adding to the economic indicators we need to start resting some of its costs. For instance every time someone has to leave whatever he is doing in order to answer an uninvited call, offering you something he could do without, then you should automatically rest a couple of quid from your GDP.

Let us pray that immediate financial adjustment is not too expensive

Sir Gillian Tett analysis some linkages between the bank crisis in Japan and the current difficulties encountered by the western financial system in a great article “Financial faith found wanting” January 2. Of course the title is a little bit insulting since what has been really been found wanting is the financial knowledge that was supposed to correspond all the investor’s faith deposited.

But what I really would like to comment on is that there is a very substantial difference between the management of the both crisis and we really do not know how this will plays out. Tett quotes Tadashi Nakamae with “Japan’s… banker’s stubborn refusal to recognise bad debts and authorities´secretive attitude amplifies the problem in the long run” and this is although true might also be a very low price for buying the necessary time to work it all out in a more orderly way. The current system with its minimum capital requirement rules bindingly agreed upon in the Basel Accord and the mark to market accounting rules; and that forces upon the banks rapid adjustments with no delays allowed might indeed result in less rain, in the long term, but could lead to a monsoon that though brief could destroy much more value. We will just have to see… and pray.

Finally let me also acknowledge the fact that at least one former regulator, Mr Timothy Ryan is starting to recognize their responsibilities in this whole mess saying “Former US bank regulators like me feel a bit responsible because we used risk-adjusted capital rules to put riskier assets of balance.” As I said, it is but a start. The part of appointing the credit rating agencies as the financial watchdogs of the world is still pending.

The US does not have to ride away in the sunset

Sir we certainly hope that anyone getting back to work on this January 2, 2007 reads the articles about America in the order you seem to suggest, first Niall Ferguson's scary "An Ottoman warning for America" and then the slightly more soothing "Prepare for a global economic downturn but not a disaster" by Wolfgang Münchau. Even so he must become extremely concerned.

I do not see things in America that bad since as life-long consultant with much workout experience I am used to immediately look for the reserve of important things that seems feasible to correct and that could generate a turn around. This particular reserve seems quite large in the US, and I am not just referring to the Iraq war.

If the US would though taxes raise their gasoline prices to European levels; put some corrections in their runaway health-sector costs; reform their bankrupting tort system; not keep over two million of their citizens in jails or prisons; accept that when the check arrives is not the best moment to sent away those who might help you pay it, like the immigrants, then we would have to conclude that the US has still a long way to go as the empire. Of course if the US can't find it in them to correct those things, it would indeed be riding away in the sunset in a The End, but then this would also not really be because of economic problems but because of something totally different.

Not even new jobs are needed, just a little income support would do

Sir Prof Jacob Borne makes a well argued case for to "Give the tree choppers more profitable jobs than logging" December 31 but I would add that since chopping logs is really not that profitable we should just give some income support to all those who live in the tropical rainforests and engage in traditional and environmentally sustainable non-logging activities.

We actually do not need to produce new high tech manufacturing jobs in the Amazon; a couple of hundred dollars per family a month, for them to improve their living conditions, while they keep an eye on their forest for all of us would do wonders.

The problem is that though we quite easily find ways to support our local parks and national forest reserves this seems so much harder when it comes to maintaining the health of our global common goods like our lungs in the Amazon.

Where has financial liberalization taking FT?

Sir your editorial on "Where the financial liberalisation got us" December 29 contains a doubtful statement, some declarations of faith and a big dose of understandable financial sector partisanship.

First can we really speak about liberalisation while a fundamental part of the financial system, namely risk evaluation, is chained by the regulators to the limited criteria of a few credit rating agencies? Before, in banking, there was more of a "you banks you do as you like but only indoors" while now it is more of a "you banks can go out but remember always to do as your nannies the credit rating agencies say" and we could spend years discussing which is the most liberal of those two systems.

Second, among the credos you recite is that of "but before the first Basel agreement on capital adequacy reserves often bore little relation to a bank's risk", and this is something that we all hope is true, but not necessarily so when we see so many banks scrambling around for more capital. Also when you say that "capital [has] been allocated more efficiently" we have to wonder on what basis you are sure of that since most of us would only be able to come up with a "and let us so pray".

Finally, on partisanship, your "Whereas 40 years ago many millions of young people may have wanted to borrow against their future income, in order to go to university…" contains a whereas that might be a little too sweet for our taste when we now read about so many students struggling to repay their loans.

The government needs to help turn subprime dollars into prime

Sir Saskia Scholtes writes that the "Helping hand could prolong subprime pain", December 22, and though she argues it well it really does not have to be that way, if the helping hand knows how to help.

Let us suppose that a subprime borrower has a set amount of dollars that he could pay to service his mortgage. In the financial markets, because of discounting of risks, the worth of that dollar cash flow is much lower if it is classified as a subprime lending operation than whether it is viewed as coming from a prime operation. And here is where the government could help turning his subprime dollars into real prime dollars. Could it really be so hard? I mean they are still exactly the same dollars.

A thousand dollars paid monthly during 15 years discounted at 11 percent is worth 88.000 dollars today while the same payments discounted at 6 percent is worth 118.500…35 percent more!

If the government is willing to guarantee, up to a specified amount, the mortgage payments of those who currently own and live in a subprime mortgage financed house then this would empower the borrower to renegotiate with the lender some much better terms, for each of them. This is a win-win strategy for them. Freezing the rates but keeping them subprime is, at best, just a win-lose proposition.

Could this cost the taxpayer some dollars? You bet! But then again someone has to pay for the bank regulators having appointed the credit rating agencies as their financial overseers and with that allowed some small sub-primely awarded mortgage virus to spread globally.

Why do you not make the real problem part of the solution?

Sir in your editorial "Subprime shake-up" December 22, you comment on the Federal Reserve's new proposals for some new mortgage lending practices in exchange for those "that led to this year's subprime debacle" You also recommend that regulators enforce their rules better, for instance by inspecting loans at random… but were not the credit rating agencies supposed to do that?

You must be fully aware that even with much worse lending standards there would have been no subprime debacle at all had the credit rating agencies not blessed the securities backed with these mortgages with their prime credit ratings, and so I must ask why you do not make the real problem part of the solution?

You also mention the risk of over-regulation, but Sir, is not in fact the appointment of the credit rating agencies as the supreme risk overseers in the financial markets the mother of all over-regulations? I believe mortgage bankers are quite capable at handling their job so why not let them get back at it again and get rid of those who fouled it all up?

A bailout in the dark?

Sir Mark Fish and Benn Steil in "Root out bad debt or more pain will follow" December 21 make clear the problem that the government has in helping out the subprime mortgage mess namely that the whole securitization process with its slicing and dicing has made it difficult to see where the final losses really lie, and therefore, while reaching out in the dark to help you might mess it up even more. Fish and Steil recommend the purchase of the underlying mortgages at deep discounts while I would prefer buying the houses where a real bona-fide debtor lives at a discount and arranging for a lease and sale back contract that makes sense for the taxpayer and the current owner. Anyhow whatever route is taken one needs at least to be sure that the underlying problem is cleared once and for all since experience says that there is nothing more expensive that keeping a problem pending in the sole expectation of losing less

A necessary though not so welcomed reminder

Sir Martin Wolf’s “The dangers of living in a zero-sum world economy” December 19 is a splendid, necessary but of course quite unwelcome aide-memoir for all of us that feel that we have been somewhat unworthily blessed with peace and prosperity during our life time and worry that we will not be able to guarantee the same for our children.

I fully agree that we will have to count on human ingenuity to save our descendants from the dark ages that already lurk close (hugo chávez), but to that end we also need to keep on believing that goodness and badness does not add to a zero-sum human condition

Beware of bank regulators acting like gods

Sir John Plender asks what is the right level of capital for today´s financial world, “Investors pray for acts of God but even they come at a cost” December 19. His question contains its own answer. Since it is in fact impossible to calculate the right capital then the best thing would be to be humble about it and require one single capital requirement for all assets, instead of arrogantly trying to outwit the market as the regulators did when they created their current minimum capital requirements that differentiates based on how risks are perceived, primarily by the credit rating agencies.

It is when the bank regulators themselves start acting like God that they really set us up for the big systemic disasters.

We need to stop this financial hocus-pocus!

Sir Arturo Cifuentes writes “Weak Basel II may not be enough to calm credit fears” December 18. Of course not! Basel II is just digging us deeper in the hole where the regulators placed us when they so unwisely thought that risks could be determined; and came up with their minimum capital requirements for banks based exclusively on risk, as determined in Basel I by the credit rating agencies and in Basel II by the models of the banks themselves. Those arbitrary regulations were the main cause for all the financial hocus-pocus we are now suffering.

If there is anything rational for the regulators to do now it would be to swallow their pride and require the same percentage of capital for all credits; give the banks some time to orderly adjust to this; and let the markets price the risk of the banks, for instance by forcing the banks to issue subordinated debt as was suggested by the Shadow Financial Regulatory Committee back in 2000.

To top it up, based “the bigger they are the harder they fall” I would also add some additional progressive capital requirements or insurance payment based on size.

A leap into the darkness defines 2007

Sir Gideon Rachman in “Five events that have defined 2007” December 18 unable to identify one single event gives us a list of them and argues that all are loosely linked together by the strain they put on the US. I do not agree with him. Among Rachman’s candidates is the “August: the credit crunch” and since even now, at the end of 2007, the supposedly most sophisticated financial machine that our knowledge economy has ever known does still not have a clue about where they find themselves, no one could have doubts that this event, almost a leap back into the dark ages, must by far be the most defining event of 2007.

Transparency is not completely without value

Sir I am not sure I get or even want to get the full drift of John Dizard’s “Time to admit that the models don’t work”, December 18. As I read it states that through the inter-central bank swap the lines Fed might provide liquidity to the non-US central banks so that these having less restrictions than the Fed can help out taking on their books some of the collateralized debt obligation initially owned by the US banks but swapped into the European banks.

If do this is of course a major operation that gives a totally new meaning to central-bank cooperation though I am not really sure I would like to be on the European side of the bargain. That said if risk adverse central bankers think that the conditions are serious enough to warrant this, why on earth do they not recommend their respective governments to proceed with much more targeted fiscal support measures that can perhaps be better explained to the taxpayer?

I for one would always prefer my government helping directly the mortgage holders who I can at least identify as the beneficiary, than having it give support through the purchase of some debt collateralized with mortgages, where I won’t have a clue whom they are truly benefiting, and the authorities will have to plead blissful ignorance.

No Santa comes Christmas?

Sir Kenneth Rogoff with his “The Fed must not play Santa to the markets” December 18 tells us to be careful since besides recession inflation might be lurking around in the woods. Okay that sounds like a reasonable warning from a reasonable man; problem is what are we to do with it? Given that our current problems might very well be derived from the fact that the Fed dressed as Santa during the rest of the year does Rogoff mean that comes Christmas they should now dress in academic robes?

Not Darwin but Frankenstein, not intelligent but unwise

Sir in “The great dying”, December 14, Niall Ferguson discusses the possibility that Darwinian evolution might explain the financial sector’s current difficulties although in the end he also clearly acknowledges that some “intelligent design” had to do with it.

When the bank regulators by means of the Basle Accord decided to drive risks (and creative destruction) out of banks, and imposed their exclusively risk based minimum capital requirements on the banks, they drove in fact banking business out of banks. When they simultaneously also appointed the credit rating agencies as their Blackwater type overseers of risks they also drove bankers out of banks.

The current turmoil is therefore much more a consequence of a Frankenstein’s not so intelligently meddling with the banks and Darwin has nothing to do with it that is unless of course you refer to the bank regulators themselves.

Don't they co-ordinate?

Sir, you and everyone praise the co-ordinated actions of the Central Banks but besides those who might argue that could increase the systemic risks, who could argue against the co-ordination of actions between central banks, in fact that in a globalized world they could even think of acting in an un-coordinated way makes us shiver.

Having said when you in “The charge of the central banks” December 13, mention that “the cavalry has arrived” let us pray they brought with them the right ammunition as the enemy has not yet been completely identified.

For instance, besides liquidity injections I would suggest the central banks now give the banks sufficient time to adjust their capital ratios for past sins. What is the need for having all the banks run simultaneously to find more capital just because they have now discovered a fire that has been burning for quite some time?… to add panic to panic does not seem the best of co-ordinations.

Finally, let me say a word about the conditions of the battlefields. The current plans to have the subprime mortgage sector freeze the interest rates amount only to an aspirin and no solution. The only thing that can really make solvent the markets is turning the subprime into prime; like by having the government buy those houses at adjusted prices, financed by the current lenders, and leased out to the current owners turned into tenants and giving these a repurchase option at a price that would hold the taxpayer harmless.

Emigrants/Immigrants of the Whole New World Unite!

Sir if John Gapper can ask “Workers of the New World Unite!”, December 13, when referring to scriptwriters and designers then clearly the same rights should be bestowed on those that voting with their feet and with their remittances are perhaps even more the real workers of the New World, though they still lack a unison voice…. Emigrant/Immigrants of the Whole New World Unite!

Since in gross earnings the emigrants/immigrants definitely represent one of the major economies in the world, they (and the global corporations) are really the ones who should next be empowered with Chairs at the Executive Boards of the World Bank and the International Monetary Fund.

The awakening of the financial world

Sir Martin Wolf is daring and right taking on the issue “Why the credit squeeze is a turning point for the world” December 12, but perhaps it is not really the credit squeeze that makes for the inflection point, but more so the general crumbling of some financial credos that were rightly inspired by the knowledge economy but that have turned out to be so lacking in wisdom. We and especially the regulators should have known that.

The appointment of the credit rating agencies to lead the way and yet believing in that the free market would operate freely would be laughable if not for the consequences.

I pray Wolf’s article opens up an urgent debate since our bank regulators are currently, among others with Basel II, just digging deeper and deeper in the hole where we find ourselves.

All is not bad news though. One good thing that could come out of this awakening is to allow banks to be banks again. In many developing countries where the banks because of the risk adverseness introduced by the bank regulators from Basel through their minimum capital requirement formulas, are more and more financing the “risk-free” public sector and the securitized-consumers, and less and less the more risky but yet vital entrepreneurs, and so the comeback of more traditional banking is urgently needed.

Energy is not allocated on a first come first served basis

Sir your editorial “Dark side of the hunt for energy” December 12 is really questionable on the grounds that the US energy consumption is seven times that of China on a per capita basis, and there is nothing to tell us that energy should be allocated on a first come first served basis.

We need to go from ninety days to ten years

Sir if not necessarily “the most” I would absolutely agree with Mr Karel Volckaert opinion that employee compensation is a very telling risk profile indicator when it comes to banks and the financial system in general, December 12. In this respect I also think it behoves us that all the institutions awarded the franchise of “last recourse protection” have employee incentives plans that are based on the medium and long term results, ten years, and not just the next quarter.

The differences between winning a presidency and a Nobel Price

Sir after reading Michael Bloomberg’s “America must resist protectionism” December 12 I am torn between being happy that he is not running as a candidate and is therefore free to spell out the truths and sad because he is not running. Seems you can’t have the cake and eat it too running for president… though you can win a Nobel Prize for being environmental conscientious without even daring to spell out that gasoline/petrol taxes are needed in the US.

You must solve the dollar problem with real and not virtual solutions

Sir we have a saying in Venezuela that goes something like “the baby’s crying and the mother is pinching him” and something like that came to my mind when reading Fred Bergsten’s “How to solve the problem of the dollar”. December 11.

If the dollar is really in problems and there are no other currencies willing or able to shoulder its weakness, offering to the trillions of dollars existing in the financial oceans the possibility of converting them into the Special Drawing Rights currency baskets and of which $34bn of value are currently swimming around in the bathtub of the International Monetary Fund, does not seem a solution that carries enough punch. This is something that Bergsten recognizes, but only after he has made his case for radical and insufficient solutions.

Also hearing that the funds would be recycled into the same securities currently offered and that the funds gold holdings of (only) $80bn could provide additional backing, just makes me want to cry more… and perhaps run for the gold myself.

The fact is that if you cannot diversify yourself out of a currency into other currencies then the fault might not lie with the initial weak currency but with all of them and, if so, then you diversify yourself into assets, and then you might realize that the US is not so weak after all, at least if they decide doing something about their weaknesses, like raising the taxes on their petrol/gas consumption to European levels.

You see sometimes the most important assets of a nation are not so apparent because they live in that hazy world of public policies that could be corrected. The US in their gasoline consumption and in their health sector has a world of this type of hidden assets just waiting to be taken to the market.

Allow the banks to be part of the solution

Sir in reference “Chance to restart the stalled securitised credit machine” December 11, and where John Dizzard touches upon a crucial theme I would like to comment the following.

Much of the currently unsatisfied financial needs of the market is directly related to the need of the banks to increase their capital in accordance with the minimum capital requirements set by the regulators in order to sustain on their balance sheet the homecoming of many assets and to make up for the many write-downs.

Since most of this movements are occurring not really because problems appeared but more so because problems were discovered, I cannot understand why the regulators cannot give the banks some time and leeway to rebuild their capital and thereby allow them to help out containing a crisis for which, if it is allowed to snowball, there is not enough capital to take care of the avalanche anyhow.

While writing your European rule book, please don’t forget us

Sir let me take the opportunity of Mr Tommasso Padoa-Schioppa, Italy’s economy and finance minister telling that “Europe needs a single financial rule book” December 11, to piggyback a request that in that rule book there should also be a clear and explicit wording about what to do with the subsidiaries of the European banks in developing countries in times of crisis.

The price of the rescue plan could be much lower

Sir you opine that the US subprime initiative is “A rescue plan that is worth the price”, December 8. That may be so but unfortunately the plan by keeping all the mortgages linked to the subprime sector of the market and therefore requiring higher rates keeps the price, in this case paid through the implicit interest rate subsidies that lenders have to absorb, unnecessarily high even if no default occurs. You see whether it is through the loss of interest or the loss of capital, a dollar lost is still a dollar lost.

Much better would be an alternative whereby the US government helped these subprime mortgages deserve prime rates. That this would cost the taxpayers additional money is ludicrous; just wait to see how not solving the problems right will cost the taxpayers money by other means, perhaps as an outright recession.

Personally I favour the idea that the US government, just as it sometimes can buy oil for a Strategic Petroleum Reserve, should offer to buy outright 2.000.000 of the houses currently involved with subprime loans; at a price well below the current outstanding mortgages, a one shot capital loss; financed by the current mortgage holder at government rates; and giving the current debtor a option to repurchase his house in a couple of years at a price that would keep the tax-payer from being harmed.

We are keeping away the minor tremors that keep the big earthquakes away.

Sir nothing, nothing, nothing of the current financial turmoil would have occurred if the credit rating agencies, empowered by the bank regulators to signal that it is possible to measure risks objectively, had not spread around the subprime virus. Of course using the credit rating agencies in the short tem can be something very good and expedient but in the longer run it can only lead to major disasters as the number of questioners are silenced. In my country, Venezuela, whenever there is a small tremor people applaud as these keep the major earthquakes away. Unfortunately, our current bank regulations seem more destined to keep the minor tremors away and it behoves all of us to do something about it.

The poor prospective of the Bank against the North

Sir when on your first page you announce the birth of Bank of South you state that the six signing parties aim “to challenge the influence of US-based organizations”. I would contend this is a great exaggeration. Perhaps such a thing might be in the mind of the extremist of the group but for instance a country like Brazil has no interest whatsoever in challenging the World Bank or the Inter American Development Bank, on the contrary it is quite logically doing their utmost to strengthen their voice in those institutions.

Initial funds will be placed in the Bank of South and rapidly withdrawn by each investor for their own favourite projects and thereafter,with its role reduced to paying the salaries of some bureaucrats, it will most probably linger unproductively forever and ever. Could not the south benefit from a Bank of South? Of course, but not from a Bank against the North.

Should we restrain from finding the truth and just go for the usual suspects?

Sir Gillian Tett in “US subprime blame game spreads overseas” December 7, says that “while some politicians think rating agencies are convenient whipping boys, policymakers know that if that line of attack goes too far, it risks undermining investor confidence in the entire credit world.”

That is indeed a totally valid argument but, if we are going to avoid even worse systemic financial crisis in the future, we must also dare to reach further yet and raise the issue that the policymaking-regulators are also to be blamed for having empowered the credit rating agencies too much.

Relaxed going down and relaxed going up

Sir Samuel Brittan afraid of overly tight monetary policies states in "That old Stagflation dilemma again" that when now cheap imports from China might be coming to its end that "the first job now is to convince people that monetary relaxations this winter in spite of rising inflation represent a tactical retreat and not the start of a headlong rout". He is right but we should not forget that the previously falling inflation, helped by China, was also used as support for monetary relaxation, and so the asset bubble resulted.

This time it was in fact the regulators who started the whole craziness

Sir David Pitt-Watson tells us that the “Lessons of the credit crisis are not just for regulators” December 5, and of course he is right, who argues the opposite? But when it comes to accountability it might be important to state that this should also be applicable to regulators.

Pitt-Watson mentions that “To be assured that these loans were credit worthy the market passed on this accountability and responsibility to credit rating agencies” but he forgets that, in the case of the banks for example, it was actually the regulators, by means of how they calculate the minimum capital requirements, that basically ordered the banks to make the credit rating agencies their pipers, and I have not yet heard the first regulator being fired, paying a fine, or even named and shamed for doing a crazy thing like that. On the contrary they seem all to be fine and dandy and ready to help out again…with our taxes.

Tons of knowledge for a gram of wisdom!

Sir we are experiencing how prime credit rating agencies pointed us toward clearly subprime directions; not knowing where the risks and the losses of the current financial turmoil are; and sometimes finding out that your highly sophisticated investment banker, whom you pay well, cannot tell you how much your investment is worth, not even on a give and take 20 percent basis.

Since we also so frequently hear references to the concept that our economy has become more knowledge-based, should we not, if only out of modesty, start to downplay that illusion?

Having been an Executive Director of the World Bank a couple of years ago I was of course bombarded with the concept of the Knowledge Bank, then and now my reaction was the same… “Forget your tons of knowledge and please give me a gram of wisdom!”

No use in crying wolf… there are better ways

Sir Martin Wolf searching to explain why the world seems not to be responding as it should to the growing threats of climate change, places the responsibility for it with the individuals saying “if they are to tolerate radical change in the energy use, people must first be frightened and then they must be offered a easy way out”, “Why the climate change wolf is so hard to kill off” December 5.

Although this basic premise sounds right, and should be right, unfortunately it is not right, and so if we sit for that fright and that easy way out to happen, we will all chop down our last tree, just the way we did on Easter Island.

I people knew it was very dangerous to smoke, I people was never offered an easy way out, it took two years of hell, but I people did it because the opportunity costs of not quitting, namely the nagging from wife and daughters, was just too big for any macho man to endure. In similar fashion many governments have managed to come up with ways of how to impose very high petrol taxes on their voters just because the incentives of fiscal earnings were very high.

And so, what is truly needed to get results on climate change is to align the incentives and empower the agents of change. For instance if you want to reduce the use of cars in the US, which is an environmental must, let local authorities auction off public transport monopolies and thereby enlist bus manufacturers and bus drivers in the army fighting climate change.

Wives and daughters (leaders of the world)… get us working on the climate change… you like heat even less than we do.

Financial Time’s Hillary Clinton interview

Sir the following is my reaction after reading the interview of Senator Hillary Clinton, conducted by Financial Times ’s Washington bureau chief Edward Luce.

Protectionism: Full fledged competition in a globalized world would have eroded the profitability of many companies had we not awarded them the protection of intellectual property rights, and invested some serious money in making that shield mean something. Can you imagine Microsoft in a world where efficient software copiers are free to roam?

Therefore since most of labor have not been furnished similar new protections, and some old ones have in fact been taken away, it should not come as a surprise that the share of labor income as a percentage of GDP is dropping, and that this is, certainly and rightly, creating a source of conflict.

So what’s to be done? There are only two choices? Either we award to labor similar protections which would set us all on a de-globalization route, a lose-lose proposition; or we must require that the beneficiaries of intellectual property rights give back some extra of their quasi-monopoly based extra earnings to the society. As an absolute minimum, this should represent the direct cost of enforcing and defending their rights. Is this protectionism? No at all!

Review of existing trade agreements: Absolutely. In some of the US bilateral agreement some prohibitions were imposed on developing countries because at the time they were considered as appropriate, but hindsight has led to other conclusions and so these clauses need to be revisited. For instance some US trade agreements prohibit any restrictions on capital movement even though now these restrictions are deemed quite good at taking away some of the excessive volatility that the waters of the global financial oceans can have on local bathtubs.

Energy and environment: “the most important thing is getting the US focused on energy efficiency, on clean renewable energy, combating global warming on raising gas mileage etc.” Just like the recent Nobel price recipient Hillary Clinton does not have the courage of spelling out what is primarily needed to really alter the energy and environment realities in the US, namely a substantial tax on gasoline consumption.

Housing crisis: Just like the US can sometimes use a Strategic Petroleum Reserve I would suggest the government buying a large amount of the houses currently involved with subprime loans; at a price below the current outstanding mortgage; financed by the current mortgage holder; and giving the current debtor a option to repurchase his house in a couple of years at a price that would keep the tax-payer form being harmed. That’s what I would do… but then again I am no PhD and so I could be wrong

I pray we will become one nation again!

Sir my country Venezuela is a world war one battlefield. Two deeply dug in trenches with about a quarter of the voters each, another quarter of the voters running exposed in no mans land, and the final quarter wandering around bomb shocked and oblivious to all in the neighbouring woods. I pray to God we will become a nation again.

Please do not sell US assets at bargain basement prices!

Sir reading John Gapper’s “America must live with being a bargain basement” December 1, and the sale of 4.9 percent of Citigroup to an investment arm of the Abu Dhabi government, it somehow led me to think about the “Memoirs of a Geisha” that describes the creation of a vicious competitive bidding process in order to maximize the value of a young girl's virginity. I just wonder whether if someone had previously set a maximum limit to how much of a Citigroup could be sold to middle east countries before being blocked similar to how the takeover of some US ports were one would not have been able to generate that scarcity value that could have led the investor to gladly fork out at least twice what they paid for those shares. Sincerely, in these days when we read of billions of run away losses in a world that has no idea where to invest, one could believe that the shares of the bank that never sleeps in the US and that is one of those that has seemingly become too large to fail should be worth a bit more.

There are other strengths in the US of course but the assets of America are the main line of defence when it comes to hold up the value of those dollars we are all holding and so if these assets start going at bargain basement prices, then we are all really in a jam.

We must help people to go where they feel they belong… alive

Sir Christopher Caldwell in “Rioters vs state in a test of will” December 1, quotes the Socialist leader Malek Boutih saying “they are whole populations here that don’t feel they belong to this country” and informs that the bodies of the dead boys “will be flown to Morocco and Senegal, respectively, for burial”, which leaves us all with the question of why could they not have been flown there alive?

The poor in developing countries frequently face no other choice than to emigrate to richer countries in order to survive physically but many alienated and frustrated citizens of developed countries do not really have the choice to emigrate somewhere else in order to survive emotionally, and perhaps they should have.

For instance if these dead boys had had the option of selling whatever French citizen’s rights they had to a foreigner truly interested in coming to France and with that money could have financed their resettlement to Morocco or Senegal perhaps we could have solved the problems on two fronts.

Clearly it is not as easy as that but the world needs to find new and different ways to fight violence originated from deep sentiments of alienation with other means than violence.