"Disaster economics" is also a consequence of regulations that push the banks into what is officially deemed “infallible”.

Sir, Gillian Tett writes “We have entered the world of disaster economies” July 24, in which she analyses investor behavior, safe assets and sovereign bonds, and finds that in the case of for instance US and Germany, even though credit default spreads might be increasing, bond yields can fall. 

Amazingly, nowhere in her analysis, does Ms. Tett take into account the fact that one of the major financial actors, the banking system, has to operate under a regime of capital requirements based on risk, and therefore, lacking capital, has no choice but to park their liquidity where the least capital is required, like in US and German bonds.

John Kay, we all wish regulators had regulated based on bankers’ behavior

Sir, John Kay in “Finance needs trusted stewards, not toll collectors” July 23, writes of a new regulatory approach introduced in the 1970s and 1980s “based on behavioral regulation”. 

Not so, though we sure wish they had done just that. If so, regulators would have set the capital requirements for banks based on how bankers behave with respect to perceived risk, instead of as they did, based on the perceived risks.. and as if no one was perceiving these. 

And if regulators knew bankers as well as Mark Twain did, “those who lend you the umbrella when the sun shines and want it back when it looks like it is going to rain” then they could have set the capital requirements slightly higher for what is perceives as absolutely not risky, instead of the immensely lower, and then the world would not have fallen into this “safety” trap crisis.

There is a massive state stealth intervention of the financial markets

Sir, Francis Fukuyama writes that “Conservatives must fall back in love with the state” July 21, and I do indeed agree on the need for a complete organizational overhaul of a state that has become an amorphous monster, in order to turn it into a lean and efficiently mean governing machine, though, perhaps, “Conservatives must help the state to become more lovable”, would be a better phrasing. 

The problem is how do we get from here to there? Especially since the here is so much worse than what conservatives (and the left) can imagine. 

The here includes the most massive state stealth financial intervention ever. By means of that concoction known as capital requirements for banks based on perceived risk, the banks need to hold immensely more capital when lending to a “risky” citizen than when lending to an “infallible” sovereign… and that as you could understand translates into an immense subsidy for government borrowings and allow the governments to exercise their financial repression so much easier. 

Look at the current treasury yields and ask yourself if these would be the same without the help of bank regulators. No way Francis, it is one of the least transparent but largest taxes ever. How much tax is a purchaser of 30 years US bond yielding 2.55 percent paying? Not so lovable eh!

And what about FSA´s rate rigging?

Sir, Patrick Jenkins and Caroline Binham report “FSA steps up probe into bank rate rigging”, July 20. I just wonder when someone will initiate a probe into FSA´s very own rate rigging.

The FSA must have known that by using capital requirements for banks based on perceived risk, they were effectively rigging the interest rates charged by banks in favor of those perceived as not risky and against those perceived as risky. And the net effect of this rigging is of course immensely larger and damaging than any Libor rigging. 

And if the FSA did not know that, then the really urgent probe should be about the selection process of bank regulators.

Any country declines if it starts taxing risk-taking

Sir, congressman Paul Ryan writes many truths in “Republicans must return to free-market principles” July 20, the truest in my opinion being that of “the defeatism of those seeking to manage the west’s decline. 

But if the congressman would just pick up his phone and call a banker in his constituency, to ask him how much capital the bank needed to hold in order to lend to an unrated a more fuller understanding about the urgency of returning to free-market principles. 

With immense hubris bank regulators, thinking themselves to be the risk-managers of the world, started to allot risk-weights which determines how much capital a bank needs for any specific asset. And, that translates into extraordinary interest rate subsidies to what is officially perceived as not-risky and extraordinary interest rate taxes on what is officially perceived as risky. 

What drives a country forward is its willingness to take risk. If bank regulators skew the access to bank credit in favor of the not-risky, those already favored by risk-adverse bankers, then the country will stall, decline, and finally fall drowning in obese bank exposures to what is officially deemed as absolutely not risky.

The pro-cyclical tsunami machinery

Sir, Sir Samuel Brittan starts his “An ancient Greek approach to modern economics” July 20, taking about cycles and ends it with the need for “removing distortions at the micro level”. He might be interested in the following macro micro distortion that is taking economic cyclicality to unimaginable levels. 

A European bank was authorized to lend to Greece holding only 1.6 percent in capital, which meant being able to leverage Greece’s risk-adjusted margins 62.5 times, and so it did, but, unfortunately, so did too many other banks, and Greece went bust. 

And now, when the bank has lost all its capital, it is required to hold many times more capital if lending to Greece, and so the European bank has no other choice but to lend to Germany, as so must all other banks do, something which does not require it to hold any capital. In fact, if lending only to the infallibles, then the bank would not even need shareholders, and could retain all bank profits for bankers’ bonuses. 

If this bank regulation is not a machine for creating a tsunami of pro-cyclicality, what is?

We all need to get rid of a despicable incestuous crony state capitalism

Sir, when a bank needs no equity, which means it needs no shareholder, in order to make a loan to its government, because its government is declared “absolutely risk-free”, and therefore the government has much easier access to bank credit than does a normal citizen, like a small business or entrepreneur, that classifies as a serious case of a despicable incestuous crony state capitalism. 

In this respect, John Huntsman, writing “True conservatives despise America´s crony capitalism” July 19, would be well served by looking at how bank regulators have been able to introduce, in his USA, odious discriminations in favor of what is officially perceived as “not risky” and against what is perceived as “risky”, something which must be completely anathema in a “Home of the Brave”. 

Huntsman writes about “the need [of] financial reform so that innovators and entrepreneurs have access to capital without turning our banking system into a public utility”. For that, at this moment, nothing is as important as throwing out the regulatory paradigm of capital requirements for banks based on perceived risk of default… besides, he should know, that in banking, what is perceived as risky, does never ever pose a major systemic risk.

Was the USA, the Home of the Brave, built based on risk-avoidance?

Sir, Professor Glenn Hubbard presents “A conservative growth agenda for the US economy” July 18. It includes primarily “getting or fiscal house in order and reforming the tax code” the latter because it “discourages work and entrepreneurship… and distorts the allocation of capital.” 

I have no problem with that, but how come no conservative (nor progressive) growth agenda includes getting rid, immediately, of those capital requirements for banks based on perceived risk and which discriminate so odiously discriminate in favor of what is perceived as absolutely not risky (which includes government) and against those perceived as risky, like the small businesses and the entrepreneurs? If anything is distorting bank credit allocation that´s it. Frankly, Professor Hubbard, was the US, “the land of the brave” built based on risk-avoidance? I do not think so! 

In fact these bank regulations are as close to a virus that instills cowardness as can be… and, if I was part of a Homeland Security, I would definitely look into it… as it is an issue of national security.

What I would look for, as a bank investor.

Sir, Sebastian Mallaby writes “Breaking up thebanks will win investor’s approval” July 18, and this is absolutely correct, provided we do not consider the costs and the dilutions that must result for those breakups to be successful… there might be a lot of alimony to be paid. 

But, as it could be of interest to some of your readers, let me expose what I would be looking for, as a bank investor. 

The first thing I would want from the bank is that it dedicates itself exclusively to lending to what is officially considered as “risky”, like small business and entrepreneurs, and for which the bank is required to have capital... which of course means that I as a shareholder will count. 

In other words, I would abhor my bank to lend to anything that is officially considered as “absolutely safe”, for 4 reasons: a.- it will probably mean they will be less careful, b.- they can do so with much less bank capital and so therefore as a shareholder I become less important, c.- it is only in what is considered as not risky that the banks can build up that type of exposures that can lead me to lose it all, and d.- if I want to invest in something perceived as “absolutely not risky”, I certainly do not need a bank for that… we can all read the credit ratings.

By the way, I suppose you know about "risk-adjusted rates of returns"

What if “swift execution” had been the pillar of Basel II?

Sir, in May 2003, as an Executive Director of the World Bank, during a workshop on Basel II, I told some hundred regulators: 

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.” 

When we now read Gillian Tett´s “America´s timely lessons in killing off toxic banks” July 17, we should think about what would have happened if “swift execution” had been the pillar of Basel II, instead of those mindless capital requirements based on perceived risks which could only guarantee increased toxicity and the too-big-to-fail banks?

Want more opportunities and less inequality? Then scrap capital requirements for banks based on perceived risks.

Sir, Lawrence Summers, proposes university to promote economic diversity in “How the land of opportunity can combat inequality” July 16. 

Let me proposes a more immediate way, scrapping capital requirements for banks based on perceived risk. These drive in a further inequality wedge between those perceived as risky, most often the have-nots, and those perceived as safe, most often the haves, at the same time it makes it more difficult and expensive for small businesses and entrepreneurs to get an opportunity. 

What good would it make for universities to introduce opportunity slots for the poor if then, when the poor graduates, his jobs will much depend on legacy networks? 

“Ah but then our banks can become unsafe!” Don’t be silly, when have you ever heard about a bank crisis caused by too much lending to what was considered risky? 

Ps. I have recently introduced a complaint before the Consumer Financial Protection Bureau arguing that these capital requirements go against the Equal Credit Opportunity Act (Regulation B)

Why does not Professor Stiglitz get it?

Sir, I refer to Samuel Brittan´s “Unequal measures” and where he reviews Joseph Stiglitz latest book, July 14. As a former Executive Director of the World Bank I have over the years had several opportunities to interact with Professor Stiglitz, although that of course does not mean he should have the faintest idea of who I am.

Nonetheless, in doing so, it has been an immense source of frustration to me not being able to get him to understand that if your bank regulations have, as its principal pillar, that lending to those who are perceived as risky require the banks to hold more capital than when lending to those perceived as not risky, you are effectively, and aggressively, impairing the rights of the "risky" to an equal opportunity to access to bank credit… and that this signifies one of the most important drivers of the increased inequality. 

And Professor Stiglitz, like so many other experts, stubbornly keeps on mentioning excessive financial risk-taking as the cause of this crisis, not wanting to listen to the argument that it was because of excessive trust in things not being risky, cést pas la même chose, only because that does not perhaps fit his agenda. But then perhaps it is also so that when you get a Nobel Prize, it is only human to stop listening to anyone else but yourself. If so let that serve as a consolation, and warning, to all of us non Nobel Prize winners.

And again, failed regulators, want to show off as puritans!

Sir, the first article I published in my life, in June 1997, was titled “Puritanism in Banking”. In it I expressed serious concerns about how bank regulators, after a crisis, were overdoing it, in order to either show off or to have their previous lax oversight forgiven. It all gave way to a sort of “I am a stricter regulator than you are… no you aren’t… yes I am… no you aren’t… Yes I am, yes I am, yes I am.” 

The article ended with “If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.” 

Today, fifteen years later, I get the same sinking feeling when I read about a request for “all banks everywhere to raise their tangible equity capital to 20 percent of assets”, Chris Giles’ “The bank that roared”, July 14. 

Do they not calculate how much bank capital would need to be raised in order to do that? Or are they contemplating keeping the risk-weights, which in such a case would mean causing even higher distortions? 

I believe that the basic 8 percent of capital requirements of Basel is sufficient as long as it is not diluted by risk-weighting. Already to achieve that 8 percent, for all assets, constitutes a major challenge, considering that some current capital requirements for banks are basically zero, like for instance when lending to the “infallible sovereigns”.

There’s also a need for a profound change in the culture of regulations

Sir, Sir Mervyn King, the Bank of England Governor lashes out with “From excessive compensation to deceitful manipulation of one of the most important rates, we can see we need a change in the culture of the industry”. Sorry, as a regulator he is not really one to speak about the need for a culture change.

Only because of the capital requirements based on perceived risks, the regulators caused the banks to charge hundred and so basic points in higher interest to those perceived as “risky”, like small businesses and entrepreneurs, and hundred and so basic points in lower interest to those perceived as not risky, like infallible sovereigns. If that is not manipulation of the most important rates, I do not know what that is.

And besides, most of the excessive compensations to bankers arose from the fact that regulators freed the bankers from having to compensate shareholders by requiring so little bank equity. By the way, on that issue, it might be better for Sir Mervyn King to lie low, because there could be calls for claw-backs on all types of compensation.

What was “not-risky” turned into risky because it was allowed to earn too high returns on bank equity.

Sir, I much appreciate Martin Wolf mentioning that I have reminded him regularly that “crises occur when what was thought to be low risk turns out to be very high risk”, arguing that “For this reason, unweighted leverage matters”, “Seven ways to clean up our banking ‘cesspit’” July 13. 

This is true, but what I have mostly tried to remind and explain to everyone, with less success, is about the dangerous distortion regulatory risk-weighting produces. 

For instance, Robert Jenkins, Member of the Financial Policy Committee, Bank of England, in a recent speech said: “The successful investor is not interested in promises of short-term return on equity; he is interested in achieving attractive risk-adjusted returns. The higher the perceived risk, the higher the return required. The lower the perceived risk, the lower the return expected. Capital will flow with either combination but its price will be different” 

What Mr. Jenkins, has not fully realized yet is that when regulators decide to allow banks to leverage their equity much more when something is perceived as risky than when something is perceived as not risky, they completely distort the system, producing the opposite; the higher the perceived risk the lower return on equity and the lower risk the higher the return. 

And this distortion is sheer lunacy, as it assassinates the risk-taking a society needs in order to move forward; and also dooms our banks to end up gasping for profits and capital on some beach that was perceived as very safe, but was not, when it became overcrowded

It's what's safe that's risky!

When "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." Martin Wolf

https://www.ft.com/content/7a95df3e-cb50-11e1-b896-00144feabdc0

Wolf ends with:“We cannot hope for miracles. But we can make bankers more useful and less dangerous. Focus on that.”

Indeed, let's all focus on that.

Please free us from imprudent risk aversion and give us some prudent risk-taking

My 2019 letter to the Financial Stability Board: Acknowledged and Ignored.

PS. Read what #AI ChatGPT OpenAI opines on this.

Here a 2010 homemade YouTube in which I tried to explain the Global Financial Crisis with a 2x2 matrix.

“The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages.” Paul Volcker

PS. 2023 tweets

A tweet: "Incentives matter: The escape valves of risk weighted bank capital (equity) requirements, cause banks’ risk models to be more about equity-minimizing/leverage-maximizing, than about analyzing bank assets’ true risks. That’s life!"

Another tweet: "The world has been duped/lulled into a false sense of security by the use of risk weighted assets (RWA) as a real and valid measure of banks' risk exposure. E.g., the duration risk of #SVB long-term government bonds is not included in the weighted risks."

Another tweet: “SVB regulators were ‘asleep at the wheel’” What’s a supervisor to do? Inform his boss Treasury bonds' 0% risk weight must be increased?  It is difficult to get a man to understand something, when his salary depends on his not understanding it” Upton Sinclair

Another tweet: "The most dangerous risk banks take, #unwittingly, is the buildup of huge exposures with assets perceived as safe, those which caused all major bank crisis. Regulators’ risk weighted bank capital/equity requirements, unwittingly, puts that risk on steroids."

Another tweet: "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 [risk weighted bank capital/equity requirements] may calcify its structure and break with any small wind."

Another tweet: "Bank capital/equity requirements mostly based on perceived credit risks, not misperceived risks or unexpected events, e.g., covid, inflation, war, interest rate rise, doom banks to stand naked, when needed the most, when hardest to raise equity"

Another tweet: “A regulation that regulates less, but is more trigger-happy & treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might lead us to… the mother of all bank crises”

Another tweet: "Risk weighted bank capital/equity with decreed weights: 0% government – 100% citizens, as if bureaucrats know better what to do with credit than e.g., small businesses and entrepreneurs, is that communism, fascism or just plain vanilla Banana Republic?"

Another tweet: "#SVB have all besserwissers Monday morning quarterbacks explaining us duration risk; why holding long-term government bonds was dangerous. Not a word about why regulators require so little capital/equity/skin-in-the game against these assets.

Another tweet: "The stress test that shall not be dared. What if that what’s perceived as safe is more dangerous to bank systems than what’s perceive risky, and therefore the risk weighted bank capital/equity requirements do not reflect real bank risks?"

Another tweet: "When concocting the risk weighted bank equity requirements, evidently no regulator asked: What would Mark Twain opine about with what assets banks might create dangerously large exposures, with some perceived as risky or with some perceived as safe?

On bank regulations, I’m not a newcomer nor a Monday morning quarterback.

Crises occur when what was thought to be low risk turns out to be very high risk

In July 2012 in “Seven ways to clean up our banking ‘cesspit’” Martin Wolf wrote: “In setting these equity requirements, it is essential to recognise that so-called ‘risk-weighted’assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk. For this reason, unweighted leverage matters. It needs to be far lower.”

What's really dangerous to our bank systems is what's perceived as safe, not what's perceived as risky

Martin Wolf in "Seven ways to clean up our banking ‘cesspit’" July 12, 2012 wrote:

"Fifth, in setting these equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk. For this reason, unweighted leverage matters. It needs to be far lower."

P.S. And still they (he) don't get it... or do not want to get it

It takes bungee jumping to get us out of this, so please let those wanting to risk it jump!

Sir, I refer to Martin Wolf’s “We still have that sinking feeling” July 11. 

That is nothing to be surprised about, in an economy where governments and central banks pour fiscal deficits and liquidity on it, while simultaneously bank regulators impede bank lending to basic economic engines like small businesses and entrepreneurs, just on account of these being perceived as “risky”. Containing the indispensable risk-taking is pure and unabridged assisted suicide of the economy. 

And Wolf comments again on deleveraging, but seems not able to understand the fact that the economy is more underleveraged than ever on what is originally perceived as risky, something which is of course quite different from an over-leverage to what was perceived as absolutely not risky but then turned into risky. 

Stop wasting time on important but completely secondary issues, like manipulative Libor settings, excessive bonuses and what have you, and start acting urgently on allowing the risk-takers take the risks we all depend on.

If you temporarily lower the capital requirements for banks when lending to small businesses and entrepreneurs, by for instance 50 percent, the banks will NOT build up excessive exposures to these, because bankers never do so to something they perceive as risky, then you would at least allow some of the willing risky risk-takers to start helping us risk-adverse citizens.

But at least stop the regulatory disunion of European banks.

Sir, Wolfgang Münchau gives many reasons for “Why we won’t solve the eurozone crisis for 20 years” July 9, among others the difficulties of approving and implementing a banking union. 

That might be so, but, meanwhile, there is no reason to make the crisis worse by feeding the disunion produced by the bank regulators when it applies different capital requirements to European banks when lending to different European banks. Those distortions, they could get rid of over just one weekend.

The mother of all (official) interest rates manipulation.

Sir, capital requirements for banks are larger when these lend to something perceived as risky and lower when to something perceived as not risky. It is an utterly absurd proposition, because what is perceived as risky has never caused a major bank crisis. But, much worse, it also signifies that those perceived as risky must pay higher interest rates and those perceived as not risky lower interest rates, than would have been the case absent these regulations. And this amounts to an extraordinarily large official interest rate manipulation… and its effect is way more than some few basis points… and the widening of the spread between risky and not risky according to my calculations is way over hundred basis points. 

So let’s see what all those perceived as risky, usually correlated with the have-nots, who already pay higher interest rates, would have to say about regulations that made them pay one percent more in additional interest on all their bank loans, while those perceived as not-risky, usually correlated with the haves, who already pay lower rates, had to pay one percent less. 

I have now at least registered a general complaint at the Consumer Financial Protection Bureau CFPB, established in the Dodd-Frank Act, indicating that this odious discrimination against the “risky” does not seem to be allowed under the Equal Credit Opportunity Act (Regulation B).

Though a bad outcome is usually associated with risk it does NOT mean it was produced by something "risky"

Sir, “The tale of sober nonconformists... yielding to investment bankers with a thirst for risk” is how John Plender subtitles his “How the traders trumped theQuakers” July 7. 

He is wrong. Investment bankers do not thirst for risks but for profits, and therefore they loved and used the high leverages of equity they were authorized to have by their bank regulators, when engaging with something officially perceived as not risky. 

And the fact that we associate a bad outcome with something risky does not mean it was produced by something risky, in fact often the really bad outcomes, are produced by something perceived as absolutely not risky. Precisely what happened in this crisis, when the correlation of what went very wrong, and the low capital requirements allowed, is absolute. 

This, the fact that like Plender most experts keep on using the mistaken hypothesis of excessive risk-taking, is tragic, because that stops them from understanding what really happened, in order to be able to correct for it. That is why Basel III is digging our banks even deeper in the hole they were placed.

And again, Big Blunder was kept under the table

Except for when fraud was present, bank crises have always resulted from excessive lending to what was perceived as absolutely not risky. There were never too large bank exposures to what was originally perceived as risky. 

Even so bank regulators decided to favor what was perceived as not-risky, and which was therefore already so much favored by banks, by means of allowing banks to hold extraordinarily little capital against these safe assets, and which allowed them to leverage more their equity. 

And as a natural consequence of favoring the not-risky, they imposed a de-facto regulatory tax on the risky, those already being taxed by banks precisely on account of being perceived as risky. 

And this extraordinary regulatory mistake, the greatest intellectual blunder I know of, plus the various responses to the current crisis, among others ignoring Big Blunder, has caused the most monstrously obese bank exposures to what is officially perceived as not risky and, in relative terms, truly anorexic exposures to what is perceived as risky, like to small businesses and entrepreneurs. 

And from the looks of it, unless there are immediate regulatory changes, all our banks seem doomed to end up gasping for profits and capital on the last officially perceived safe beaches, probably US Treasury and Bundesbank. 

I had bad feelings about it all quite early. In November 1999 in an Op-Ed in the Daily Journal of Caracas I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse, of the only remaining bank in the world” And little did I know that the regulators were creating the AAA-bomb that detonated in mid-2007. 

And over the years I have written more than a hundred letters about this regulatory mistake to Martin Wolf, the influential Financial Times’ chief economics commentator; so many that he has accused me, quite rightly perhaps, of being a monothematic bore. 

And this is why I feel sad, for all of us, when, five years into the crisis, I read about Mr. Wolf enjoying lunch in Paris (a “perfectly pink” foie de veau), in the company of Jean-Claude Trichet, recently the chair of the oversight body of the Basel Committee on Banking Supervision, and still blithely ignoring Big Blunder. 

Or, in a mutual admiration club context, perhaps it is not comme il faut to speak about mistakes. If so, how sad silly club rules trump truths. Talk about a not- so-brilliant “unités brillantes.”

FT, why preach to others what you do not do yourself?

Sir, in “An emerging risk” July 7, you correctly state that “Misdirected credit can channel too much money into… a sector and this can create a dangerous bubble”, and that “suboptimal credit allocation can harm economic growth both in the short and the long run”. 

And then you urge developing countries to ensure “credit flows where it is most needed” and that “credit flows are driven by economic and not political considerations”. 

And so let me ask, what’s wrong with following those same suggestions at home? Right now, yours not too bright regulators are just assuring that bank credit flows to what they officially perceive as “not risky”, for absolutely no good purpose at all. 

Don’t you see they just keep inflating the too safe bank assets bubble?

FT is not covering itself in much glory either

Sir, in “Nursery politics and Libor fixing” July 7 you urge politicians to “ensure that credit flows to the real economy” and yet you refuse to advance my argument that the “real economy” cannot be advanced by capital requirements based on perceived risks, since these have nothing to do with it.

You cry out for politicians to engage in “serious debate” and not act “little more than a pair of bickering schoolchildren”, and yet you feel yourself authorized to silence one of the very few voices you know alerted about the crisis, even in FT, just because that could hurt some weak egos of some FT prima-donnas.

Bank regulators too, must be chronically stressed.

Sir, John Coates writes “Chronic stress can cause us to recall mostly negative moments, to se danger everywhere, to succumb to learnt helplessness… The trading community may thus become irrationally risk averse, causing the markets to freeze and monetary policy to become all but ineffective” “Banks should train their traders like Olympic athletes” July 7. 

How interesting, this condition applies also perfectly well to our bank regulators who got us in trouble by giving banks too much incentive to venture into the officially perceived risk-free land, where for instance over 60 to 1 bank equity leverage was allowed, and have thereafter frozen in fear insisting that banks shall pursue even more what is officially perceived as risk free… and thereby dooming our banks to end up gasping for profits and capital on the last officially perceived safe beaches, probably US Treasury and Bundesbank.

An anatomy of a crisis, for what purpose?

Sir you hold that Spain needs an “Anatomy of a crisis” in order to understand what went wrong with its banks, July 6. Nonsense! We know that already. The banks just went for financing too much the real estate sector, because bank regulators, regarding that as safer, allowed the banks to hold less capital.

How to break up a too big to fail and too big to capitalize bank... in hours!

Sir, Sebastian Mallaby is absolutely right about that the too big to fail banks must be broken up, ”Woodrow Wilson knew how to beard behemoths” July 5.

The largest problem though is that they are also too large to capitalize, as a consequence of the current capital requirements being too small for assets perceived as not-risky, but that are turning riskier by the hour, and which have left the banks with a contingency of extraordinary needs of capital. 

As a consultant I table the following break-up plan. 

First, decide that all resulting banks will need to have 8 percent in equity against any asset from there on. (See the Ps) 

Then create four management teams and have them, in turn, round after round, select 10 billion of assets belonging to Senior Mammoth Bank, until you have four Junior Mammoth banks. 

Then force all those who hold credits against Senior Mammoth bank in excess of 250.000 dollars to convert whatever percent of these is required to cause each of the four Junior Mammoth banks to have 8 of all assets in equity. 

And then let the market work swapping assets and pricing the final value of the breakups. 

If, there is a need for it, repeat the process again, for each of the four juniors. 

Ps. Mallaby writes “If the regulators impose a simple leverage ratio, measuring a bank’s capital against its assets, then they fail to distinguish between risky assets and safe ones, perversely rewarding banks that make the diciest loans.” He is stubbornly wrong. 

The difference between risky and not risky assets is already covered for in the interest rates, the size of the exposures and other terms, and so what the current risk-weighting produces, is an amazing distortion that allows the banks to earn (leverage) more on their equity, on what is perceived as not risky. That just dooms all our banks to end up gasping for oxygen and capital on the last officially perceived safe beach… perhaps, the US Treasury or the Bundesbank.

If you want to invest in a bank then you need to know that your capital injection is the last one needed… otherwise you are better off waiting for better opportunities. The regulators postponing bank capital increases into the future, thinking they are helpful, are just making everything so much worse, for everyone. 

Governments, start by guaranteeing one hour of work per week for absolutely everyone, and then take it from there

Sir, Robert and Edward Skidelsky, in “Enough is enough of thewest’s age of consumption” write that “Government should gradually reduce the maximum allowable hours for work for most occupations, guaranteeing a job for everyone who wants to work that amount of time” July 5. 

Wrong! Governments should gradually increase the guaranteed hours of work for all workers. Start guaranteeing one hour and move up from there! 

Government has no role guaranteeing more hours of work to one who already has more than the average hours of work.

Without a banking sector capable of assuming risks, there cannot be a recovery

Sir, Richard Lambert ends “Britain’s banks are too fragile for political games” July 4, with “The economy cannot recover in the absence of a stable banking system: nothing can be more urgent than that.” He is correct, but neither can the economy recovery with a banking sector with capital scarcity that, as a result of the capital requirements based on ex ante perceived risk, is basically ordered to avoid the risks associated with a recovery of the economy. 

The way you are going, with those highly distortive capital requirements, all our banks are doomed to end up gasping for oxygen and capital on the last officially perceived safe beach… in the best case, for the UK, gilts, but also, perhaps, the US Treasury or the Bundesbank. 

And the Financial Times is not capable to warn about this?

If European regulators discriminate against Spain and Italy, why should not the citizens do the same?

Sir, Martin Wolf in “A step at last in the right direction”, July 4 writes that “Rational Spaniards and Italians still cannot regard a euro in their banks as being as safe as a euro in a German one, largely because elevated insolvency and break up risks evidently remain” and he forgot to add that this is also because bank regulators feel the same and require any bank to hold more capital when lending to a Spanish or Italian bank, than Germany, just because their respective sovereign has a lower credit rating.

The way we are going, with those highly distortive capital requirements, all our banks are doomed to end up gasping for oxygen and capital on the last officially perceived safe beach… probably the US Treasury or the Bundesbank.

The priority in Europe should be, urgently, to correct these outrights dumb capital requirements.

And with respect to the intellectual capture of FT, where does the buck stop?

Sir, of course, Barclays´ fiddling with Libor affair is a scandal, and you are entirely correct to question whether its Chairman´s resignation based, on a the buck stops here, suffices, “Barclays scandal” July 3. 

But much more scandalous than that, at least with respect to its implications, is how the buck, of how regulators, fiddling with risk weights, manipulated the interest rates in favor of those perceived as not risky and against those perceived as risky, and that does not even appear on the radar-screen. 

It will be interesting to see in the future, where in FT the buck for withholding the analysis that places the largest blame for the crisis in the lap of regulators stops. 

Really, how did you allow yourself to become so intellectually captured by that so dangerous nonsense of capital requirements for banks which discriminate based on perceived risks elsewhere already discriminate for? 

As is, in my mind, FT is in part responsible for the fact that our banks might all end up gasping for oxygen and capital on the last safest shores, which at this moment would seem to be the US Treasury and the Bundesbank.

Sorry, Gillian, try acting like a better financial journalist

Sir, Gillian Tett holds that “banks need to redefine why they exist. A new sense of mission and modus operandi is required, “Don´t just say sorry, Bob, try acting like a steward” July 3. 

But in a much similar vein, I could also ask Gillian Tett to try acting as a better financial journalist, and inform her readers that, in all the bank regulations produced by the Basel Committee, there is not one single word that pertains to what the purpose of the banks is and, notwithstanding that, the regulators still gladly proceed to regulate, totally unencumbered. 

Ms. Tett also mentions Mr. John Taft of Royal Bank of Canada´s request that banks act as wise stewards of the nation´s cash. How are they supposed to do that? Ms. Tett must know by now that function has already been usurped by the bank regulators who, with great hubris, act like the self appointed risk managers of the world, and allocate, in a very haphazardous way, the risk-weights which determine the capital requirements for the banks… and thereby really determine the directions of the nation´s cash. 

Over to you Ms. Tett, try to inform your readers more completely.

Bank regulators need to empower the shareholders of banks.

Sir, John Authers prays for that “Shareholders will play a decisive role in banker’s pay” July 2. 

Yes, that could happen, if regulators order the banks to listen more to the shareholders. And, for that to happen, they have to get rid of regulations that basically tell the bankers to ignore their shareholders. For instance, in Basel II, if a bank lends to one of the “infallible sovereigns” it is not required to have any capital, any shareholder, at all. 

The best way regulators could help to empower shareholders again is to require the banks to hold, for instance, 8 percent in equity against any asset. 

A European banking union should not discriminate between European sovereigns.

Sir, in “One small step for European mankind” June 30, you subtitled it with “The lethal sovereign-bank embrace begins to be pried loose”. 

Hold it there, not so fast, the most lethal part of that sovereign-bank embrace, is that which allows banks to leverage much more its equity when lending to a sovereign perceived as “safe” than when lending to one perceived as “risky”… something which neither sounds much compatible with having a European banking union. 

If those regulations are not changed, they will only doom all the European banks to end up with dangerous obese exposures to the last perceived safe haven in Europe, probably Germany.

And what about conceit in journalism?

Sir, Gillian Tett writes correctly that “Libor affair exposes big conceit at the heart of banking” June 29, but there might equally be some big conceit going on at the heart of journalism. 

Two questions: What is the most important dollar reference rate… the risk free US Treasury rate or Libor? And, who has effectively manipulated those rates the most, Barclays the Libor rate, or the bank regulators the US Treasury rate by means of allowing the banks to hold these instruments with less capital than other assets? 

Clearly, in terms of its significance, the manipulation of the US Treasury “risk free” rate has been much more significant than whatever Barclays can have done to Libor but that, Gillian and her colleagues at FT decided to ignore, with much conceit.


Should not an anthropologist be about the most humble of all professionals? 

And when regulators manipulate interest rates, is that ok?

Sir, when regulators set the capital requirements for banks based on perceived risks, even though these perceived risks are already priced in by the bankers in the interest rates, they are though perhaps unwittingly, effectively manipulating the interest rates. The direct consequence of it is that those officially perceived as not-risky, have to pay much less in interests than what would have been the case without this distortion, and those officially perceived as risky need to pay much more… and all for absolutely no good reason at all. 

And so when reading “Barclays fined a record $450m” for manipulating interest rates, my first thought was, “well done, but where can the “risky” small businesses and entrepreneurs also sue the regulators for all the monstrously excessive interests they have had to pay over the years? 

Simple calculations indicate to me that a not-rated bank client, exclusively on account of this odious regulatory discrimination, has to pay about 270 bp (2.7%) more in interest rates when compared to an AAA rated bank client… or, like now, in times of extremely scarce bank capital, suffer the consequences of being excluded from access to bank credit.

Europe needs to eliminate the subsidy of the “risky” to the “safe”.

Sir, Martin Wolf gives a good but incomplete analysis in “Look beyond summits forsalvation” June 27. 

Like all others intellectual prisoners of the bank regulatory pillar of capital requirements based on ex ante perceived risk, he fails to understand how all the banks are currently condemned to end up gasping for air, and capital, on the last officially deemed safe-havens in town, Bundesbank and US Treasury, more sooner than later. 

As a result he also fails to understand the artificially imposed regulatory subsidies that the “risky” European countries pay to the “safe”, by means of the much lower interest rates the latter must pay when compared to what would have been the case absent these regulations.

Bank regulations are beset with nanny populism

Sir, Nick Clegg in “Be alive to the risks and rewards of a banking union” June 27, states “We have put in place a bank levy, weighted towards riskier activities”. That is pure unadulterated bank regulatory nanny populism, as it implies that the government, ex ante, knows more than the market and the banks about which are the riskier activities, ex post. 

To know how wrong that is it suffices to see what caused the current crisis, namely excessive pure vanilla investments and loans to what was considered officially as not risky and therefore required minimum capital of the banks. 

Mr. Clegg, and all of you other intellectual prisoners of the current bank regulations paradigm, please do not forget that market and banks already clear for risks and so when a regulator does that too, he only produces dangerous distortions.

Credit rating agencies are just only other weathermen

Sir, imagine the old Mark Twain banker, he who wants to lend you the umbrella when the sun shines but wants to take it back as soon as it seems like it is going to rain. That banker would clearly be taking notice of what the weathermen had to say, to set the interest rates, the amounts of the loan and the other terms.

But what would happen if the regulators also told the banker that if the weatherman spoke of sun his bank was required to hold little capital but, if of rain, it had to hold more capital?

Obviously that would doom the Twain banker to choke on sunny expectations (AAAs and infallible sovereigns), and avoid possible rains (small business and entrepreneurs) like the pest… only to find out, too late, that weather reports are not always accurate.

Patrick Jenkins writes “Rating agencies still so relevant they need regulating” June 26. If he had understood the horrible consequences of the excessive and outright unmerited relevance given to the credit ratings, when deciding the capital requirements for banks, he would not be arguing for regulating these agencies but on reducing their relevance. Is the weathermen regulated?

PleaseFT, read the letter I wrote and that you published January 11, 2003

The correlation between the problem loans of banks and the lower capital requirements is 1

Sir bank regulators caused the current financial crisis by allowing banks to hold very little capital, for what was ex-ante officially perceived as not risky, and are deepening it by requiring them to hold more capital when there is none to be found.

Victor Mallet and Miles Johnson should really have titled their article “The bank that broke Spain” June 22 as “The Regulators that broke the bank that broke Spain” For how long will FT turn a blind eye to the sad fact that the Western World is drowning in seriously undercapitalized Bankias?

The Great Bank Retrenchment to the Last Safe Haven is on full speed ahead and so all our banks seem doomed to end up trampled to death on the shores of the Bundesbank and US Treasury.

What does Michel Barnier know about fairness?

Sir, Michel Barnier, the EU commissioner overseeing financial services calls on US authorities to apply regulations fairly, “The US must not seek to override EU regulators” June 22. Frankly, what does Michael Barnier, and other regulators know about fairness?

The regulators forced those perceived as risky and who therefore already had to pay higher interest rates, had less access to bank credit, and needed to accept harsher terms for their borrowings, to be additionally discriminated against, by means of causing higher capital requirements for banks than what is the case when banks lend to those officially perceived as not risky.

If that is not unfair what is? Especially when considering that no bank crisis ever has resulted from excessive exposures to what was perceived as risky, as these have always, except when pure fraud was present, resulted from excessive exposure to what had been believed to be absolutely not risky. 

And by discriminating that way so unfairly against the risky, the regulators themselves caused the current crisis, which is something they would have known had they dared to run a simple regression between the real current bank loan problems and their lower capital requirements, as it would have shown a correlation of 1.

Why do bank regulators subsidize Germany’s borrowings and tax Spain’s?

Sir, I refer to your “Eurozone weights another palliative” June 21, and many other writings referring to the increasing interest rates on some European sovereign borrowings.

The capital requirements for banks when lending to Spain, is much larger than when these lend to Germany, why? Is the risk differential not already imbedded in the rates? Is not the interest rate spread between those borrowers higher than they would be in a free market? Is this not counterproductive? Why does Germany receive a regulatory subsidy while Spain has to pay a regulatory tax?

Lacking a sufficiently large safe haven the Eurozone needs to stop its retrenchment.

Sir, Wolfgang Münchau, in “What happens if Angela Merkel does get her way”, June 18, asks “Why should citizens leave their money in local banks, when foreign investors are pulling out and when even the EU is making preparations to impose capital controls?” Indeed, why? But, worse so, why should they do it when bank regulators in Europe, by means of the capital requirements for banks based on perceived risk, have for a long time been ordering a European retrenchment to safety, foolishly believing that to be possible? 

It is of course the whole Eurozone that is in danger, as there is no way the Europe would find a sufficiently large safe haven for all. And this is why I have often found reason to mention that perhaps the Eurozone should not concern itself so much solely with Greece, Spain, Italy and Portugal, but more proactively try to find a more general solutions, based for instance on a Euro II, or a Euro-North and a Euro-South.

That could perhaps provide it with the tools to get out of this horrendous mess, detonated by bank regulations which among other allowed European banks to lend to Greece leveraging their equity a mindboggling 62.5 to 1... a mess made so much worse by now requiring they reduce to a 12.5 to 1 leverage or less that same exposure.

Mr. Sir Mervyn King and Mr. George Osborne, here is a much better proposal!

Sir I refer to Martin Wolf’s “We should not pin our hopes on Britain’s plan A-plus” June 16. 

Why should not those not creditworthy who want to borrow not be allowed to compete for access to bank credit on the same regulatory terms than those who are creditworthy but do not want to borrow? That is a question that Martin Wolf should try one day to answer, as currently the banks are required to hold more capital when lending to the risky than when lending to the not risky. 

This issue of discriminatory bank capital requirements is ignored over and over again, by those who feebly believe, even after all current evidence against such nonsense, that the best thing to do is to make sure that already risk adverse bankers avoid taking any ex ante deemed high risks. It is truly sad to see what a brave society can reduce itself to, when it allows its nannies to reign supremely. 

Instead of a temporary banking funding scheme such as is proposed by Mervyn King and or George Osborne I propose that regulators urgently calculate any individual bank´s capital to total assets ratio, and ask for it to apply a capital requirement that increases ever so slightly on any new asset it acquires… until reaching some basic goal. That way they would be able to put the banks on a stronger footing to lend, with much less distortion.

On the current banking reform plans, I feel more like crying.

Sir, First question: What is worse, a general systemic bank crisis that destroys the economy, whether inside or outside a ring-fence, or that taxpayers need to pay for some of the losses of that crisis? Clearly the occurrence of the systemic crisis is the worst since the latter is just a consequence, and the taxpayer would still have to pay in so many other ways. 

Second question: What caused and is causing the current crisis, bad lending and investments by the banks, or too little bank equity. Obviously the first, since if all bank lending and investment yielded a positive return for the bank, in theory there would not even be a need for bank equity. 

Third question: What really caused the current crisis, excessive lending to what was officially perceived as not risky, or excessive lending to what was officially perceived as risky? Clearly the first, because the bank exposures to what ex ante is perceived as risky, are of course, as usual, very small. 

Fourth question: What does Martin Wolf believe caused the excessive exposures to what was ex ante officially deemed as not risky, and that he believes has now been solved so much that he gives “Two cheers for Britain´s banking reform plan” June 15? I don´t know, but if asked he would probably give me a rundown of all macroeconomic structural imbalances. See also next post "Mr. Wolf think he´s understood the problem with risk-weighted bank capital. He has not!"

But I do know that what caused the banks to indulge excessively in “safe” exposures was the fact that when doing so banks were allowed to have much less capital, meaning much more leverage, meaning much more return on bank equity, than when lending to or investing in the already scary risky. 

And since we have yet to hear the regulatory authorities even acknowledging the problem with that silly bank capital discrimination based on perceived risks which have already been discriminated for before, when setting interest rates and deciding on the amounts, I find no reason to cheer, much the contrary I feel like crying. (Especially since I have explained this to Mr. Wolf in about a hundred letters, and he was also a member of the Independent Commission on Banking)

Mr. Martin Wolf think he´s understood the problem with risk-weighted bank capital. He has not!

Sir, Martin Wolf in “Two cheers for Britain´s banking reform plans” June 15, states that rejecting a general rise in bank equity “makes almost everything depend on risk-weighted capital: a fallible, even intellectually fraudulent, concept, as the Independent Commission on Banking´s final report”. And so one could think Mr. Wolf has now finally understood the problem with risk-weighted bank capital. Unfortunately, not yet! 

The ICB report states: “Risk-weighting has merit in principle but inevitable imperfections in practice. For example, the low risk weights attributed to some sovereign bonds have clearly been inconsistent with the market’s view of the likelihood of their default. So there is a strong case for capping total (un-weighted) leverage too, as a backstop.” And this basically means that ICB thinks the problem with the risk-weights is that these could be wrong. But that´s not it, it is much more intellectually fraudulent than that! 

The use of the risk-weights based on perceived risk is wrong even if the weights are perfect, even if they are consistent with the market views, because these perceived risks have already been cleared for by the banks (by means of the interest rate, amount exposed and other terms) and so forcing that risk perception to also affect the capital of a bank, dooms the banks to overdose on perceived risks. 

If you really want to have correct risk-weights for bank capital then these would have to be calculated based on how bankers react to perceived risks. And then, at least according to Mark Twain´s “a banker lends you the umbrella when sun shines and wants it back when it rains”, you might find instead a need for higher capital requirements for banks when the perceived risk of default of the borrower is low than for when the perceived risk is high.

Europe! Stop your regulators from playing risk managers… that is too risky

Sir, Niall Ferguson and Nouriel Roubini, in “Germany is failing to learn the lessons of the 1930s…” June 9, also fail themselves when not including the necessity of dismantling bank regulations that had the regulators playing risk managers handing out discriminating risk-weights which determined the final capital requirements for banks.

Had for instance a German bank, when lending to Greece, been required to hold the same 8 percent in capital it needed when lending to a German unrated small business, instead of a paltry 1.6 percent, implying an authorized leverage of 62.5 to 1, you can be sure that Greece would never have been able to borrow as much as it did.

How sad Europe is still being analyzed by looking at the facts using the wrong hypothesis… and therefore its crisis has not yet been fully understood.

It is of no use pouring water on a drowning plant

Sir, Samuel Brittan writes “You don´t need to be a lefty to support Krugman” June 8. Of course not! But, supporting aggressive government spending to remedy a recession produced by a crisis before eliminating the cause for it, is just throwing fairly good money after really bad. 

This crisis resulted from the imposition of capital requirements for banks which discriminated based on perceived risk, and created obese bank exposures to whatever was officially deemed as not risky and anorexic exposures to what is officially deemed as risky… and that discrimination is still in full effect.. especially when bank capital is more scarce than ever.

The “risky” borrowers should also complain about discriminatory bank regulations

Sir, Shahien Nasiripour and Tracy Alloway report on the concerns of some large US banks with respect to some new capital rules because these “will hurt them relative to overseas competitors” “Fed set to announce capital proposals”, June 7. 

These banks are of course in the perfect right to object any sort of discrimination, but, when will the Financial Times dedicate one single analysis to the discrimination that many borrowers are subjected to, when their bank borrowings give cause for a higher capital requirement than the borrowing of others? 

Does FT really think that a loan to a small business or an entrepreneur, he who already has to pay a higher interest rate and can only access a smaller loan than those who have officially been declared as “not risky” is correct, and does not create distortions? 

If you only report the complaints of the big banks… you are assisting them in becoming too big. 

If FT had complained in time about the fact that a UK bank was required to have 8 percent in capital lending to the grocery down the corner but only 1.6 percent if lending to Greece then perhaps we would not be in the current mess. Who knows? 

The article also reminds us that Jamie Dimon, chief executive of JPMorgan Chase, has decried the new Basel III rules as “anti American”, or un-American as it is usually expressed. But, again, that begs the question, if the American banks, according to Basel II and III, need to hold more capital when lending to American small businesses or entrepreneurs than when lending to foreign sovereigns or corporations deemed as not risky, is that not equally anti American?

Unions don’t work based on discrimination

Sir, you and others write about “Banking union and the euro’s future” June 6, without even referring to the disunion effect discriminatory capital requirements have. 

If you really want to start a banking union then you should start by allowing all banks to be required to have the same capital when lending to each other… and the same goes of course, for all lending to sovereigns. 

At this moment a Spanish bank needs for instance to hold much more capital when lending to Spain or to a Spanish bank that when lending to Germany or to a German bank, and that only stokes the eurozone fire.

PS. This was written before I knew of the Sovereign Debt Privilege that assigned all eurozone sovereigns a 0% risk weight even if they were taking on debt denominated in a currency that de facto was not their own domestic printable one. That was even crazier than Basel I or II.

When compared to irrational regulatory exuberance, the usual market one seems like small fry.

Sir, John Kay refers to an “implausible faith in the markets”, which clearly exists, and which is clearly dumb, but which, unfortunately, is surpassed by an implausible faith in the regulators, “Only market evangelist can reconcile Jekyll with Hyde”, June 6. 

Let us just look at one example. Basel II established that banks were required to hold 8 percent in capital when lending to an unrated small business, 1.6 percent when lending to a sovereign rated like Greece was recently and zero percent when lending to a truly “infallible” sovereign, like for instance Germany. 

And that meant that banks were allowed to leverage their equity 12.5, 62.5, and infinitely to 1, and with that regulators who with much hubris thought themselves capable to act as the risk-managers of the world, considered they had eliminated bank crisis forever. Has Mr. Kay seen any type of irrational market exuberance that surpasses this irrational regulatory exuberance?

The truth is the best anti-panic agent.

Sir, Martin Wolf is correct writing that investors who are buying “bonds at current rates are indicating a deep aversion to the downside risks”, “Panic has become all too rational” June 6. 

But, how he can he ignore the fact that the officially safe havens are also being crowded by banks forced there, by regulators, because parking their liquidity elsewhere would require them to have more of the currently so scarce bank capital? 

The best way to eliminate panic is to shine light on what has caused the emergency… but seemingly some cannot find it in themselves to do so.

Fooled by the nominal interest rates, Mr. Summers asks the government to fall for another type of teaser rates

Sir, Lawrence Summers is just another economist fooled by looking only at the nominal low interest rates for government debt of some “infallible” sovereigns, “Look beyond the interest rates to get out of the gloom”. Those interest rates do not reflect real free market rates, but the rates after the subsidies given to much government borrowing implicit in requiring the banks to have much less capital for that than for other type of lending. 

If the capital requirements for banks when lending to a small business or an entrepreneurs was the same as when lending to the government… then we could talk about market rates. As is, to the cost of government debt, we need to add all the opportunity cost of all bank lending that does not occur because of the subsidy… and those could be immense. 

Mr. Summers even suggests that governments should issue debt to buy government buildings it currently rents… and to me that sounds like tempting the government to fall for another type of teaser rates. 

PS. It is amazing that the Financial Times has not made an issue yet of the current interest rates not being what the market rates they are supposed to be.

All bank spreads are not alike

Sir, Michael Mackenzie, Ajay Makan and Nicole Bullock write that the spread on US consumer mortgages has widen over the last year when compared to that of Treasuries, “Mortgage rates fillip for banks”, June 4. 

Unfortunately, their analysis is flawed as it fails to take into account that all spreads are not alike, as to earn some require the bank to hold more capital than to earn others, and so in fact the complete opposite conclusion could be the valid one. 

In these days of scarce bank capital, had they run the figures on that which most generate capital requirements for the banks, namely the lending to the “risky” small businesses and entrepreneurs then they would have seen what borrowers are really hurting the most.