The worse insults need not to include foul language.

Sir, Peter Cunningham, in “A dark, cruel comedy at the expense of the Irish taxpayer”, June 27, writes “It is in September 2008 and Ireland´s hapless government, faced with an unprecedented flight of capital from the country´s banking system and acting on the facts given to it, has decided to guarantee the obligations of all banks”.

The Tier 1 Capital Ratio of Anglo Irish Bank was reported as 8.3% in 2007 and 8.4% in 2008, and its Total Capital ratio, for the same years, 11.6% and 12% respectively, and they all seem healthy. But that of course is based on risk-weighted assets, and so, if the weights are wrong, these figures don´t say much. Sir, I wonder if the Irish authorities would have acted differently had they known, what used to be known, namely the un-weighted total assets to equity.

But Cunningham also writes “The almost total absence of effective banking regulation would be laughable had it not been so serious” and he´s wrong, because with a total absence of banking regulations, another type of crisis might have happened, but none as big and as systemic as the current.

And now the Basel Committee has decided that a small but not risk weighted leverage ratio shall also be imposed on the banks, but, read this! “Implementation of the leverage ratio requirement has begun with bank-level reporting to supervisors of the leverage ratio and its components from 1 January 2013, and will proceed with public disclosure starting 1 January 2015.”

“with public disclosure starting 1 January 2015.” You see big insults do not necessarily need to be expressed with vulgarities or foul language, they can also come dressed up in very elegant word and formulas.

And talking about cruel insults,  now they announce that “Rules to force losses on creditors in failed banks were agreed by EU finance ministers” Anyone knows of any rules that prevented creditors from suffering losses in failed banks?

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

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

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

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

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

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

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

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

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

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

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

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

Mr. John Kay, if the pillar of Basel’s bank regulations is futile, is that not a BIG story?

Sir, I refer to John Kay’s “Britain is leading the world when it comes to bank reform” June 26.

In it Kay writes “The Swiss National Bank recognized the futility of the Basel process of attempting to fine tune capital requirements to a particular risk profile of individual banks. It understood that the only way of providing adequate capital for a future that models will certainly fail to predict is to have lots of it.”

But if this is commented so naturally by Mr. Kay, may I ask where he has been all these years? If the principal and perhaps even sole pillar of all Basel II and III bank regulations, namely capital requirements based on perceived risk is futile, would that not be BIG news?

Considering all the letters I have sent Kay and his colleagues on the many problems with those capital requirements, and about which he and his colleagues have kept total silence, it does seem a bit shameless on his part to now come out as an “I always thought so”.

And Sir, I say this primarily because the number one lesson that needs to be learnt from this crisis, is how to avoid the risk of a besserwisser group of regulators coming up with something entirely baseless, and imposing it on the world, and the silence of Kay and his colleagues, even when informed of the mistakes, is part of that story that needs to be told.

And I am also saying this because the pain inflicted by those regulations on the real economy, by distorting the allocation of banks credit, is surely even larger than those afflicted upon the banks, and that part of the story has not yet even been acknowledged, not even by the Swiss National Bank.

And since John Kay makes a reference to Mark Carney let me tell you that I am not really sure you would benefit from having someone who has been and is Chairman of the Financial Stability Board, and therefore part of the regulatory establishment that came up with the Basel nonsense, and who might therefore have a vested interested in defending it, as the Bank of England governor.

What does Martin Wolf know we don’t? It would seem very important to know

Sir, Martin Wolf holds that the Fed, and especially Bernanke, must be much more careful because “Careless talk may cost the economy” June 26. He is correct, but perhaps we should remember that careless actions might cost the economy even more, but, then again Wolf seems to know something that I, and may I say we don’t.

For instance, banks can lose fortunes by investing in fixed rate long term bonds when interest rates go up (just look at the chart he provides us with) but, in Martin Wolf’s opinion, “This is purely market-risk, not credit risk. That can be managed by a mix of lower leverage and, if necessary, regulatory forbearance.” And at least I just don’t get it.

Also Wolf holds that “It is unlikely that markets would cease to fund systemically significant financial institutions that have only mark–to market losses on safe haven government bonds”… and which must also mean he believes that the market would go on financing those banks at the previous low rates. And again, I don’t get this either.

And, just in case the market would not want to cooperate with the banks, Wolf argues that “the authorities will need to have plans to address such an eventuality”. What plans? To help banks unload all this I don’t could be worthless paper on some others? Or a Quantitative Easing II, the Fed buying those bonds from banks at way above market value? And so again, I am sorry, but I just don’t get this either.

But when Wolf writes “the likely result of a credible exit [of the US quantitative easing program] will be a shift towards assets in the recovering high-income economies”, that I do understand, even though that would normally go under the name of inflation, and that would most likely also be the result of a not-credible exit or even just a “tapering” down.

Since Martin Wolf seems to know so much more at least I would much appreciate if he were to provide us with further clarifications.

By the way, should not someone who can influence opinions as much as Martin Wolf, need to make a disclosure of his own investment portfolio? Perhaps that information could also help to enlighten us all.

Current bank regulators are so dumb… and FT’s journalists do not even seem curious about it

Sir, Evelyn de Rothschild ends her “Banking must pursue the holy grail of confidence”, June 25, with what amounts to a blistering indictment of all involved writing: “To maintain its global stature, it is vital that Britain’s financial sector be understood to have rules and regulations that are effective deterrents of bad behaviour, but that also promote the dynamism our economy needs. To achieve this requires a transformation in skills and ethics from bankers, regulators and politicians”.

And I fully agree, but, the list of those who require transformation should also include financial journalists… That, because it is important that the financial sector is covered by journalists capable of questioning and not prone to get derailed by thoughts like: “No, that can’t be, the regulators can’t be so dumb”.

Because yes, and as I have explained in hundreds of letters, our current bank regulators have been unforgivable dumb.

Since ex ante perceived risks are already cleared for by banks by means of interest rates, the size of exposure and other terms, there is absolutely no reason to clear again for exactly the same perceptions, in the capital requirements for banks. But that is what the Basel Committee mandates, and that produces a distortion which endangers the real economy and the financial sector.

And yet, since your journalists cannot seem to muster even the curiosity to ask the regulators for an explanation that counters my argument… I must conclude they are… well you tell me!

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

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

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

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

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

By George, it looks like Ms. Tett finally got it!

Sir, Gillian Tett in “Fasten your seat belts tightly for a turbulent QE exit”, June 21, makes a reference to the Fed piloting the plane “in a thick financial fog, with incomplete data dials and a volatile market compass”.

I have not read anything of that sort previously from Ms. Tett but, if she is referring to the fact that given the banks are required to hold so much more capital when lending to ordinary mortal “risky” citizens than when lending to the “infallible sovereign”, and that this translates into a regulatory subsidy of US Treasury rates, which completely impedes to know what the real undisturbed Treasury rates are, then by George it looks like she’s finally got it!

Europe, I am sorry, as long your banks must use channels, and credit cannot flow freely, you will not get out of the hole.

Sir, I refer to Martin Sandbu’s “Forget the Fed – it’s the ECB that should worry investors” June 21. In it Sandbu writes that in order for the “ECB to scale its operations down private cross-border credit must resume” and that “While pre-crisis credit was often wasted, richer savers lending to borrowers (who must deploy borrowed funds better) is what economic efficiency requires”. 

Indeed, the problem though is that the reason for why so much pre-crisis credit was wasted was that bank credit was not allowed to flow freely, but had to use an irrigation system designed by regulators. In that system, the depth of the channels, the capital requirements, varied dependent on the perceived risk. For instance bank credit could flow to the Greek government in a 62.5 to 1 leverage deep channel, while if lending to an unrated Greek business it had to use an only 12.5 to 1 deep channel.

And since these capital requirements based on perceived risk are still the most prominent feature of Basel III, there is no reason whatsoever to believe the allocation of bank credit will achieve the efficiency required to take Europe out of their hole. Europe, I am so sorry, but that is how it is.

More blah, blah, blah about the safety of banks… but what about the safety of the real economy?

A sturdy healthy real economy will produce mostly safe banks no matter how little capital these have, while a weak and distorted real economy will produce unsafe banks no matter how much capital these have.

Sir, Martin Wolf, in “Reform of British banking needs to go further” June 21 mentions “distorted incentives distort risk-taking”, but this only from the perspective of the distortion produced in the banks, and among bankers, and not about the distortions produced in the real economy.

Allowing banks to leverage more and therefore be able to obtain a higher return on equity, just because something is officially perceived as “absolutely safe”, is about the most stupid way to serve the credit needs of the real economy. That means that what is perceived as “risky” will have to pay even higher interest rates and become even more risky than what it would without regulations; and that what is perceived as “absolutely safe”, will have access to even lower rates and more credit than what it should, and therefore might also become risky with time.

It is a problem that the typical borrowers of the real economy are never invited to discuss bank regulations, only bankers, some journalists, and some of the AAAristocracy are.

In the USA there is the Equal Credit Opportunity Act, also known as Regulation B, but, unfortunately, it would seem that their regulators do not care one iota about violating it.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… he thinks.

Dumb regulators are much more dangerous to the real economy than banks

Sir, let alone, without regulations, banks would take on assets based on which of these produces them the highest expected marginal risk and cost adjusted return on equity, as long as that return is over their marginal cost of capital… and that was how bank credit was allocated efficiently in the real economy.

Now they don’t. Now they take on assets based on which produces them the highest expected marginal risk and cost adjusted return on whatever equity they are required to hold for that specific asset, as long as it is over their marginal cost of capital...and that means that different assets are not treated equally by the market clearing mechanism… and that means that bank credit is not allocated efficiently in the real economy.

And that is why Chris Giles is wrong when writing “Britain’s banks are still a danger to the real economy” June 20, and leaving out the dangers of faulty regulations. Truth is that much more dangerous to the real economy than the banks, no matter a Sir Mervin King’s good intentions to “protect the economy from the banks rather than the banks from the economy” are the regulators who do not understand how their regulations distort.

PS. Sir, there are some very good regulators out there (I know of at least two, one in the US and one in the UK) and they are facing the horrendous difficulty of having to explain to their colleagues what is wrong, when the explanation on its own, implies that their colleagues have been lunatics.

To the toxic legacy of Greece we should add the lack of accountability of bank regulators.

Sir, Martin Wolf writes “For Greece was, indeed, a case of remarkable fiscal profligacy, with net public debt at more than 100 per cent of GDP even before the crisis” and “If the culpability of both sides – lenders and borrowers – had been understood, the moral case for debt write-offs would have been clearer”, “The toxic legacy of the Greek crisis” June 19.

And Wolf, not agreeing with the fiscal tightening imposed on Greece concludes “Yet the reaction of policy makers has not been to admit the mistakes, but to redefine acceptable performance at a new lower level. It is a sad story”

Indeed, but the story is much sadder yet. Behind that amazing level of public debt Greece managed to contract, lies the fact regulators allowed banks to lend to Greece holding only 1.6 percent in capital, implying a mindboggling authorized leverage of bank equity of 62.5 to 1, and they have not been held accountable for that. On the contrary, the same insane regulators, after this box-office flop of Basel II, have been allowed to produce Basel III, using the same basic script. Hollywood would never ever have allowed such a thing. And Mario Draghi, the chairman for many years of the Financial Stability Board, has even been promoted to chair the European Central Bank.

But a big part of the responsibility for that the legacy of Greece is so sad and toxic, lies of course also with journalists like Martin Wolf, who have not criticized the regulators as they should.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… he thinks.

The UK Parliamentary Commission on Banking Standards report “Changing banking for good” is, unfortunately, incomplete.

Sir, I refer to your “Holding UK banks to higher standards” were you comment on the just published report by “The Parliamentary Commission on Banking Standards” June 19. Unfortunately, it is seriously incomplete.

Current bank regulations allow for different capital requirements for different bank assets, based on their perceived risk. But, since these perceived risks are already cleared for by interest rates, amounts of exposures and other terms, this introduces a distortion that makes it impossible for the banks to perform with efficiency, their vital function of allocating resources in the real economy.

In fact, the risk-weighting calibration procedure used in Basel II is absolute lunacy and only the result of the regulators not having been sufficiently questioned by weak egos who do not want anyone to know that they don´t understand an iota about it all.

And, I am not the only one arguing this. For instance in a recent paper titled “The Parade of the Bankers’ New Clothes Continues: 23 Flawed Claims Debunked” Anat Admati and Martin Hellwig write: “the studies that support the Basel III proposals are based on flawed models and their quantitative results are meaningless. For example, they assume that the required return on equity is independent of risk”.

And therefore, the report, which starts so correctly by referencing “The UK banking sector’s ability both to perform its crucial role in support of the real economy” should, as a minimum, have asked regulators to explain, satisfactorily, why their capital requirements based on perceived risks are not flawed, meaningless and highly distortive. But, of course, FT should also have asked the regulators those same questions, a long time ago.

To reduce tax dodging, and strengthen democracy, do a full Monty and eliminate corporate taxes altogether.

Sir, John Kay is entirely correct arguing that existent corporate taxation, among other in the G8 has many serious flaws, and so “Don’t blame the havens – tax dodging is everyone else’s fault” June 19. And he presents many well reasoned ideas on how the corporate tax structure could be improved… but perhaps in this case the good might be the enemy of the perfect.

I would instead dare John Kay to think about a full Monty, and eliminate corporate taxes altogether, not only because these all will, sooner or later, at the end of the day, one way or another, end up being paid by citizens, but without allowing for the full tax representation they should have. A zero corporate tax would not only help reduce tax-dodging, but it would also help to strengthen democracy, as less would come between the citizens and their governments.

If reckless banking was to be a criminal offence, should not criminally stupid bank regulations also be it?

Sir, what would you opine if UK´s Department of education decided the exams of students should be more favorably graded the more they had stayed inside and avoided the risks of going out? And this even though long term that would mean students because of the lack of exercise they will suffer much more from obesity. If they did that would you not find it to be criminally stupid? Well, that is exactly how the regulators are regulating the banks by the use of capital requirements based on perceived risks.

I mention this in reference to Philip Augar´s “Reckless banking should be a criminal offence” June 19. If a banker can get to be hauled in front of a court, not because a purposeful endangerment of a bank but because of plain stupid recklessness, should we not have the same right when it comes to regulators? In fact, given its more overreaching implications, should they not stand there accused of high treason?

For instance, Mario Draghi, during many years the Chairman of the Financial Stability Board, agreed with regulations which allowed banks to lend to Greece against only 1.6 percent in capital, a mindboggling authorized leverage of 62.5 to 1, while at the same time required banks to hold 8 percent in capital against much smaller loans given to Greek unrated business. Is that not criminally stupid? And since regulators insist on using the same insane principle developing Basel III, do we not need to set an urgent example?

The crisis afflicting the western world is not fiscal it is the running out of daringness.

Sir I refer to Janan Ganesh’s “Britain ought to be thankful for its political class”, June 18. I cannot really tell whether it is backed by real empirical fundaments, but yet it is a fabulous ode that should at least help to stimulate, or shame out, a better behavior of politicians.

Frankly, I have no seen any similar constructive article in any of all the other divided countries that abound, and I just pray, at least for Britain’s sake, that it does not just reflect some delicate English black Jonathan Swiftish humor which has eluded me.

That said, when Janan Ganesh writes “The crisis afflicting the western world is fiscal”, he is being way too optimistic. The crisis of the western world is much deeper and reflects more baby-boomers economies reaching the point where they do not want to risk developing further, if that could endanger what they already have. In other words, a world that has reached the level of satisfaction that initially guarantees stagnation and then later leads to its fall.

The main expression of having run out of daringness, are regulatory capital requirements for banks based on perceived risk, which much favors bank lending to The Infallible and therefore hinders banks lending to The Risky.

G8, scrap all corporate tax, it only dilutes the citizen’s tax representation.

Sir, in all discussions about corporate taxes, like your editorial “The world needs global tax reform”, June 17, it amazes me how it is ignored that, sooner or later, at the end of the day, one way or another, all corporate taxes end up being paid by citizens, but in this case without the representation that tax payment should have awarded them with.

Corporate taxes stimulate politicians and corporations to negotiate in all coziness, leaving the citizens out of it.

The easiest, most efficient and best way to reform taxes on a global basis, is a zero corporate tax.

And of course there are hundreds of ways to tax citizens so as to make up for that fiscal income shortfall.

Martin Wolf, what if Sir Mervyn King had been an engineer and a bridge he helped design had collapsed?

Sir, retiring bank regulator Sir Mervyn King explains: “I think what went wrong with regulation in the period running up to the crisis was that there weren’t any obvious problems with the banks in the sense that no one was coming to the central bank for money and none was failing. So it was very hard for anyone to argue that prudential supervision was at the heart of regulation”; and his lunch companion journalist Martin Wolf kindly comforts him with a: “I say that almost nobody thought that a failure of the British banking system on the scale we have experienced was possible”, Lunch with the FT Sir Mervyn King”, ‘I’m going to miss it enormously’, June 15.

Sir, if Sir Mervyn King had been one of the members of a group of engineers who designed a massive bridge system which had later collapsed, and caused the death of millions, would this journalistic endeavor really have been acceptable to you? 

Of course bridges and banks are not the same, but do you really think our world can afford this type of lack of accountability? No wonder the Basel Committee goes on as if nothing has happened and their bank regulation only needs some tweaking here and there.

I must say though that when Martin Wolf advances the idea so dear to him that “if people are happy to lend to the government, at negative real interest rates, the government should borrow and build something” it speaks very well of him that he clearly records Sir Mervyn King's resistance: “I’m always struck when I speak to not just ministers but people who work in the Treasury that it is actually quite difficult to produce the investment projects. It’s very easy to spend money but in a way that maybe doesn’t add to the real gross domestic product.”

Here are two wicked questions for Gillian Tett on the Math and physics vs. English and history debate.

Sir, Gillian Tett, with a lot of good reasons and arguments, raises the issue of whether it is good for America that fewer students opt for, let us say harder science subjects and settle for, let us say easier English and history courses, “A need to change the subjects of desire” June 15. This is a really difficult topic and to prove here are two wicked questions for the debate:

If there were too many Americans studying science and therefore too many American scientists could be out of work, could that not provoke the kind of protectionist actions which could lead perhaps for some of the best scientists in the world not being able to get to America?

In terms of keeping the society strong, united and peaceful, what courses would you prefer that a forever-unemployed had taken…English or physics?

Gillian Tett describes another reason for using a tangible equity to asset ratio as suggested by Thomas M. Hoenig of FDIC.

Sir, Gillian Tett is on the dot with her warnings in “Watch out for the interest rate hike hit to US banks”, July 14.

And so there we have it again, with regulators fixated with credit risk, while ignoring most of the other millions of risks that abound. Here banks, not only in the US but all over the world, could be holding long term and fixed rate assets classified as absolutely safe, and therefore allowed to be held against very little capital, all of which could be wiped out by some minor interest rates hike.

This is just another evidence for why one simple capital requirement, in my opinion between 8 and 10 percent of tangible equity to assets ratio, such as the one Thomas M. Hoenig of the FDIC is proposing would make so much more sense. In fact any other type of micromanagement would only constitute an expression of regulatory hubris.

Martin Wolf, instead of peddling inflation, should be more concerned with the dangers of regulatory distortions

Sir, in “Overstated inflation dangers”, June 12, Martin Wolf writes: “So what limits banks’ lending? The answer is: its own solvency and that of its customers.” And though Wolf has served on the Independent Commission on Banking, he ignores bank regulations, which cannot only allow banks to keep on lending, to what is perceived as “absolutely safe”, even while basically being insolvent, or stop them from lending, to what is officially perceived as “risky”, even though being solvent.

Mr. Wolf is slowly and dangerously turning from a balanced “we should not be overwhelmingly afraid of inflation” spokesman, into an outright and shameless inflation peddler. So much that when he refers to the possibility of “financial repression”, he presents inflation as only a comfortable fit with it. So much that he even presents inflation as an almost welcomed option, “the simplest way”, to resolve “distributional conflicts – between creditors and debtors or perhaps between young and old”

Wolf ends though with something we can all agree with, namely: “Strong and sustainable growth is the solution. That can turn the inflation threat into a paper tiger.” But, for that type of growth to happen, we need to get rid of the distortions produced by the capital requirements for banks based on perceived risks, which make it completely impossible for banks to allocate resources in the real economy in an efficient way. Mr. Wolf, there is where the real understated dangers are.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… he thinks.

G8, by championing the Extractive Industries Transparency Directive, might be selling snake-oil-illusions

Sir, I refer to Vanessa Houlder’s note “Extractive Industries” June 11, where she writes about Cameron urging his G8 partners to champion the Extractive Industries Transparency Directive, June 11.

I certainly appreciate the efforts of the initiative but, as an oil-cursed citizen of a country like Venezuela, where over 97 percent of all the nations exports go directly into government coffers, I cannot but feel that selling the idea that that kind of transparency could solve our oil curse problems, is like selling snake-oil-illusions, something which can only help the ruler and his petrocrats.

Let me ask you, if the UK was in a similar position, would you settle for more transparency, or would you directly go for wrestling that excessive natural resource power out of your ruler’s hand?

By the way, in 2003 you published a letter in which I held that all European taxmen were, by means of gasoline/petrol taxes getting more revenues per barrel of oil than any country who gives up that non-renewable resource forever. And, since that is still true, even at current oil prices, I ask again why does not EITI’s call for transparency cover that?

Why does Ms. Tett value risk-taking here, but not there?

Sir, Gillian Tett describes how her life was saved by some daring physicians in Singapore, “How Singapore remains healthy” June 8. She also comments that, had she’d been in the USA, because of litigation risks, the doctors might perhaps not have dared to performed a risky “antibiotic gamble”.

How strange then that she has not really understood, or wants to accept, that bank regulators should not, as they do now, favor risk-avoidance, to such a degree that what is safe might become risky, while discriminating against what is perceived as risky, even if those are the ones who, living on the margins of the real economy, we most need to have access to bank credit in fair and efficient terms. Might there be an anthropological explanation for it?

Europe, to cure its malaise, more than affordable credit, needs correct and justly priced credit.

Sir, Tony Barber writes “Affordable credit for all will help cure Europe’s malaise” June 7. No! Credit should not be allotted based on it being affordable, but based on who pays its correct price.

"Credit is the oxygen of an advanced economy, innovation and investment are its lifeblood” Yes! But the alveoli and capillaries of the banking system, the lungs of the economy, have been made dysfunctional by dumb bank regulators.

And that the Basel Committee did when it decided that banks were allowed to hold less capital when lending to what is perceived as “absolutely safe” than when lending to what is perceived as “risky”, which means that banks earn a much higher expected risk-adjusted return on equity when lending the “The Infallible” than when lending to “The Risky”.

And, as a result of the messing around with the lungs, now “The Infallible” get blood with too much and to cheap oxygen while “The Risky” do not only receive blood with less oxygen but must also pay more for it. And that Sir, that is Europe´s malaise.

Yes “The Risky” borrowers are forced into the shadows, by criminally stupid bank regulators.

Sir, Anne-Sylvaine Chasanny’s and Henny Sender’s title, “Forced into the shadows”, June 7 describes precisely the results from having capital requirements for banks based on perceived risk which so odiously discriminates against the access to bank credit all those who are not perceived as “absolutely safe”. Though, where it says, “With Europe’s banks reluctant to lend”, a better phrasing would be “With Europe’s banks ordered not to lend to those perceived as risky”, because that is in effect what happens when with bank equity being extremely scarce, regulators tell banks they need more of it when lending to “The Risky” than when lending to “The Infallible”

I have explained this in perhaps over a thousand letters to FT, over many years, but FT has never understood or wanted to acknowledge how these bank regulations distort the resource allocation in the real economy. Yes, “The Risky” are being forced into the shadows, by criminally stupid bank regulators, and there is no other way to describe these.

Why cannot Martin Wolf understand the distortions the risk-weighting of bank assets produces in the real economy?

Sir, of course Martin Wolf is right when he writes “Britain must fix its banks – not its monetary policy”, June 7, I have been telling him that for years. And he is also quite correct stating that banks have become far too accustomed to the rewards of a business model based in minimal equity and support of taxpayers”, But when he limits his discussion of risk-weighing describing it as a “way of pretending assets are safer than they are”, it shows that economist Wolf has not yet understood the extent of the distortions capital requirements based on risk-weights cause.

Risk-weighting implies that banks are allowed to leverage their equity more with some assets than others, and since return on equity is their natural objective, then of course some assets, those perceived as safe, will be artificially favored by the banks, and other, those perceived as risky, artificially disfavored. And that leads to a very inefficient resource allocation in the real economy… and that will certainly prove more expensive long-term for the economy than whether banks are safe of not. And that I have been explaining to Wolf in hundreds of letters.

Yes, capitalize banks, a lot, by means of incentives or by brute force, but, most of all, we must stop bank regulators, or other bureaucrats, from acting, with immense hubris, like the risk-managers of the world.

PS. The final report of the Independent Commission on Banking, on which Martin Wolf  informs us he served, suggests keeping the concept of risk-weighting and says not a word about the distortions this produces

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… he thinks.

Dear FT Editor, are you dumb or are you hiding something?

Sir in “The UK’s capital disagreement” June 6, again you refer to the issue of whether banks should have more or less capital, and again without making reference to the distortions caused by current capital requirements which allow the banks to leverage their equity differently depending on the perceived risk. I have written about a thousand letters to you explaining the distortion, and so I must conclude that you are either dumb or that you are hiding something.

For instance, when you write that banks must raise their equity asset ratio “not by shrinking core asset” you evidence not understanding that this has nothing to do with assets being core or not, and all to do with the shrinking of assets against which the regulators demand more capital.

Sir, a banking system with only 5 percent in capital and no risk-weighting, is much safer than a banking system with 25 percent in capital against risk-weighted assets. In fact the higher the basic capital requirement is, the larger the distortions caused by risk-weighting.

Should directors do “good” things for their shareholders without informing them?

Sir, I do not really understand John Kay’s “Directors have a duty beyond just enriching shareholders” June 5.

Does Mr. Kay suggest that the proposal of not using all available legal means to avoid paying taxes could receive the same type of enthusiastic response at a shareholder’s meeting, than one of keeping the workforce happy, or one directed to help reduce the environmental impacts of the company? I doubt it.

Or is Mr. Kay suggesting that the directors should pay more taxes than needed and keep this information silent, for their shareholders’ own good? Should they receive a bonus based on how much undisclosed good they have done for their shareholders too?

Bernanke hangs around to help put out the fire he unwittingly helped to stoke.

Sir, Martin Wolf holds that “America owes a lot to Bernanke” June 5, and indeed I would agree with him, in the sense that one could owe gratitude to someone who unwittingly has lit a fire and hangs around to try to put it out.

The regulatory establishment to which Ben Bernanke, and sometimes also Martin Wolf holds he belongs to, instead of allowing the credits of the banking system to flow freely, imposed the use of an irrigation system with channels whose depths depended on the risk perceived. And of course, as should have been expected, what is perceived as absolutely safe and has much deeper and wide channels, is drowning in credit, and what is perceived as risky, irrigated with narrow and shallow channels, runs dry.

And the reason America is better off than Europe is that it implemented less of the Basel II’s more pronounce depth and width differences between channels.

Europe’s and America’s economies would have been so much better off if their central banks had used a free flying helicopter to drop money on the economy, or, even much better, if the banks had been freed from the distortions the capital requirements based on perceived risk create.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… at least so he thinks.

Authorities must learn to contain their desires to help and to meddle

Sir, Sir Samuel Brittan writes “How we can reconcile this general wisdom [that we do not know enough] with the desirability of giving individual officials definite objectives is an unsolved problem”, “Modern economics for the diligent seeker of truth”, May 31.

Precisely, it is an unsolvable problem, and that is why we need our authorities to contain themselves designating individual officers to do anything not really knowing what they are doing, no matter how much they all desire it.

Just look at what happened when the authorities designated the Basel Committee to eliminate bank crisis and those thereto nominated, not knowing what they were doing, set up a system of capital requirements for banks which guaranteed that next time when a bank crisis resulted, because of excessive exposures to what was perceived as “absolutely safe”, the origin of all bank crisis, we would find all the banks standing there naked or with very little capital to cover themselves up with.

Professor David Camroux, referring to a Robin Hood tax, seems to be just another applicant to the position of a Sheriff of Nottingham.

Sir, here is David Camroux, an Associate Professor of Science Po, quoting Jean Baptiste Colbert in that “the art of taxation” is taxing so that it is least noticed; writing that the FTT proposed by the European Commission could raise about €30bn to €35bn annually; and indicating it as an amount “rather small in comparison to the revenue needs of the 11 European Governments concerned”, and still he has the gall to refer to it as a Robin Hood tax, “FTT a feather in the cap for the average taxpayer”. May 30.

Sincerely as far as I am concerned Mr. Camroux is clearly only showing credentials to apply for the position of a Sheriff of Nottingham.

Perhaps one day we will find FTT as uncontroversial as VAT Camroux writes. Indeed, but was that to happen, that would just mean another regressive feather plucked from the goose average-taxpayer and put in an average European Commission bureaucrat cap.

If Professor Camroux really wants to help the average taxpayer, then what he should do is to question the revenue needs of their respective governments.

PS. There was a time that the FTT could have been a Robin Hood tax. That was when it was seen as an instrument to obtain resources from rich countries so as to help poor countries. But that was, at least, a financial crisis ago.

Regulators should not bet our banking system on the pigeons always carrying true messages.

Sir, John Kay writes about “Enduring lessons from the legend of Rothschild´s carrier pigeon” May 29. I would like to pick up on some of the lessons who some, like our bank regulators, have seemingly not learned.

Kay argues “Today, as yesterday, it is differences in perceptions that give rise to trading opportunities” and he is correct. But yet bank regulators insist in trying to reduce those differences in perceptions by forcing banks to heed more the opinions and messages brought by some officially endorsed pigeons, the credit rating agencies.

And in doing so they bet our whole banking system on that the pigeons were always to relay the truth, completely ignoring that our problems, and theirs as regulators, are almost exclusively to be derived from when the news brought by the pigeons happen to be false. Indeed “A damn rum thing, Wellington might have said.”

EU, ECB, what “Robin Hood” taxes are you talking about? Sounds like mislabeling to me

Sir, Ralph Atkins writes “ECB offers to recast‘Robin Hood’ tax amid fears over market impact” May 27, and I just have to ask “What Robin Hood tax?” as in its current form it seems just to be another tax collected by a Sheriff of Nottingham to feed the coffers of Prince John. 

PS. Never forget, nothing as effective against tax-havens than tax-heavens

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

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

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

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

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

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

63 year old grandfathers need to stick together, ‘cause next year… we’ll be "Sixty-Four"

Sir, to be interviewed in FT´s Life&Arts must be an honor for an author. But for 63 year old grandfather Martin Amis, to be described when opening the door to the interviewer Martin Dickson, as having skin which has advanced from “plump to papery”, clearly must spoil much of the fun.

As a 63 year old grandfather, pondering the fact that next year we’ll reach that so distant “When I’m Sixty-four”, we heard the Beatles sing just minutes ago, with our respective Vera, Chuck and Dave on our knees, I feel I should express my deepest sense of solidarity with Mr. Amis.

Is Ms. Gillian Tett now, at long last, beginning to understand what is happening?

Sir, Gillian Tett, writes about “how inefficient central banks’ pump priming has been when it comes to delivering capital to the parts of the economy which need it badly – and which are essential to long term growth”, “US venture capital falls short on love in buying frenzy” May 24. 

Since I am not a PhD, a bank-president or a famed bureaucrat, Gillian Tett might not be reading my letters, but that is precisely what I have been telling her and some of her colleagues for years, namely that capital requirements for banks based on perceived risk hinders banks to deliver credit to the parts of the economy which most needs it and which are essential to long term growth.

Perhaps this might be a reminder for her that, now and again, it is convenient for everyone, including anthropologists, to walk the streets of the real economy, and not only those of Davos and alike.

What UK (and Europe) needs, is a massive capital injection into the banking system

This is in reference to “Osborne is too complacent about Britain’s economy” Martin Wolf, May 24.

Sir, first, in the UK, if a bank would give a loan to a Solyndra, the solar power company that recently went bankrupt in the US, it would need to hold, according to Basel II, 8 percent in capital. But, if the bank instead lent that money to the UK government, and so that a UK government bureaucrat could relend it to a Solyndra then, according to Basel II, the bank needs to hold no capital at all against that. That is a huge distortion that needs to be eliminated, and to be replaced by a general capital requirements against any asset, 8 to 10 percent.

Second, because of such regulatory distortions UK banks (as all European banks) have ended up with a dramatic gross, not risk-weighted, shortfall of capital, and which now not only stops them from being able to lend but even forces them to contract. And so, when Martin Wolf writes about “the private sector has a huge structural excess of income over spending” my recommendation, instead of those huge government investment programs Wolf suggests, would be to launch a massive bank capitalization program, offering special tax incentives for all “private excesses” which are converted into bank equity.

How much capital? Whatever is needed for the banks to hold 8 to 10 percent of it, against all assets, including government debt. At that moment the general risk-profile of banks would also change dramatically. At that moment banks can start to contribute to help the real economy to grow.

Why is it that some insist that all rescue actions is to be carried out by governments? Could it be that this crisis is being exploited to advance some political agenda through the backdoor?

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… at least so he thinks.

Get over it. Set a high credible capital requirement for banks and ask for it to be met within a very short time.

Sir, you finish your “Noise and truths in the IMF’s verdict” May 23 writing: “Inadequately capitalised lenders will continue limit lending. This in turn, will hamper growth. For all the brouhaha about changing tack on fiscal policy, Britain’s priority should be to fix its banks”.

Absolutely right… and we all have known that for many years…right?

To fix the banks you need to set a high but achievable goal, let us say 8 to 10 percent of capital for all bank assets, and ask for it to be complied with in a very short time. It would also be recommendable to help out in the process of raising all that bank capital, by for instance offering some special tax incentives.

What you cannot do is to meekly be tip-toeing around the issue, because before bank investors are absolutely sure that the capital raised will be the capital needed, and that it will dramatically reduce the risk-profile of banking, they will not volunteer to try it out.

FTT is no longer a “Robin Hood tax”, now just another “King John tax”, to be collected by another Sheriff of Nottingham

Sir, Alex Barker and Philip Stafford report that “Brussels looks at incentives to ease collection of ‘Robin Hood’ levy” May 23, and I do think some clarification is in order. 

There was a time, many years ago, when some thought that the financial transaction tax was going to be used to redistribute wealth from the richest to the poorest countries. And so those days, branding FTT as a “Robin Hood” tax made some sense. Not any more, now it is a quite ordinary and traditional “King John” tax to be collected by a Sheriff of Nottingham. 

I do not mind the distribution from the rich to the poor… what I do mind is that in the collection and distribution process, most funds transferred end up in pockets other than those of the poor.

PS. Against tax-havens, nothing is as powerful as tax-heavens 

If climate change believers do not abandon their holier than thou attitude, climate skeptics will always win.

Martin Wolf writes about China that “Its leaders feel rightly, that there is no moral reason to accept a ceiling on the emissions allowed for each Chinese individual far lower that the level Americans insist upon for themselves”, “Climate skeptics have already won” May 22.

And of course, if the climate change challenge, instead of being placed in terms of a shared human responsibility, where even the poorest of the poor, as a human, has the right to feel the same responsibility as the rich, and this is instead phrased as an issue of quotas and fairness, which only divides, the climate skeptics will win… almost by walk-over.

Also, at least in the US, it is clear that the climate change challenge has been politically captured. It is almost as “if you are not a progressive-democrat, you have no right to be concerned with climate change” or “if you are concerned with the environment you have no right to be a conservative-republican”. Before climate change is freed from that sequestration, there is no chance of a united front, and again the climate skeptics win.

Wolf mentions eight possibilities to curb emissions and buy some time and I fully agree with all of them, most especially with the “go nuclear” one, our only bridge between now and when something better for the environment is found. That said I would like to make the following comments:

First, with respect carbon taxes it is important to be consistent and transparent. That little dirty trick used by some European countries of taxing gas-petrol to assist the environment, while at the same time giving out subsidies to coal, cannot be allowed.

Second, in finding the best way of financing for creating and saving energy I have often mentioned that if we can use credit ratings to determine the capital requirements for banks, something which for no purpose at all distorts , why do we not distort somewhat with a purpose and do the same based on sustainability ratings?

But, first and foremost, in terms of advancing on climate change issues, we really need to get rid of all those holier than thou attitudes, which instead of making us plant a tree, so often makes us feel like going out and chopping one down.

What did Mohamed El-Erian really hear? Should we buy or should we sell gold?

Sir, with interest I read Mohamed El-Erian’s “We should listen to what gold is really telling us” May 21.

Unfortunately I could not understand what Mohamed El-Erian really heard... should we buy or should we sell gold at current prices?

Has Robin Hood sold out and now been co-opted by King John as a neo-Sheriff of Nottingham?

Sir, Ralph Atkins and Alex Barker quote Simon Chouffot saying “You can draw parallels between the Sheriff of Nottingham and financial services, and Robin Hood redistributing gains back to those who needed it.”, “Robin Hood tax: A long shot”, May 21.

Sorry but I am utterly confused, I always saw the Sheriff of Nottingham as the tax collector for bad King John, and Robin Hood as providing good people a safe-haven in the Sherwood Forest.

Besides setting the target for bank capital, we need to think about how to get there.

Sir, Anat Admati and Martin Hellwig write that “capital ratios in Basel III rely on a complex, distortive and manipulable system of risk-weights”, “Banks are not a special case on debt-equity ratio” May 21.

They are absolutely correct, on all three counts, and that is applicable to Basel II too. But what I would like to mention is the curious fact that the “distortive” element, and which to me is the most serious flaw of Basel regulations, as it affects not only the banks but the whole market too, has received the least of attention.

There is no doubt that we need to go down the route of substantially increasing the capital requirements of banks, whether to the 8-12 percent level I favor, or the 25-30 percent level Admati and Hellwig favor. But, when considering the fact that bank capital is going to be extremely scarce while travelling on the route to the final bank capital that is needed, we should not forget that the distortive effects of the risk-weights will be more important than ever.

In this respect I opine that regulators, more than thinking about how to force bank capital increases, need to think in terms of how to help these increases to happen as fast and as smooth as possible. There might be many other ways, but personally I favor either large public sector capital injections in the banks accompanied by clear rules as to how current shareholders could repurchase that capital in order not to be diluted, or some strong tax incentives awarded to any bank that achieves a capital increase which in the short term meets the final long term target.

Would a private bank depositor insurer allowed the European banks to do what they did? No? So?

Sir, Wolfgang Münchau writes “It doesn’t make much sense but I am a Eurofanatic” May 20.

It makes me truly wonder why if so he does not want to put forward the fact that the current problems of Europe, and especially of the Eurozone, were not caused by Europe or the Euro, but essentially by faulty bank regulations.

I would just ask Münchau the following: “Do you believe a private bank deposit insurer would have ever permitted banks to lend to Greece holding only 1.6 percent in capital, something which implies mindboggling authorized 62.5 to 1 leverage and as the Basel Committee did?” I am sure his answer would be definite "No way José!" So?

I do like Europe, I do support Europe, but what I do not like is how it is being run by what seems to be a quite lousy and conceited bureaucracy. Perhaps if that changed, Münchau could feel that being a eurofanatic made much more sense.

PS. Just as a reference I include a link to my version of “Who did the eurozone in?”

Again, we would do better with capital requirements for banks based on sustainability of earth and job creation ratings

Sir, I often wonder about how strange it is that those who most present themselves as being very concerned with the health of our planet, and should therefore one would presume be the ones most concerned with making sure that scarce financial resources are used as effectively as possible to save the earth, then end up being the most willing to just throw money at the problem.

I say this because Martin Wolf in “Why the world faces climate chaos”, May 15, argues that “If we are to take a prudential view of public finances we should surely take a prudential view [on saving for humanity] the only home it is likely to have”. As I see it those two prudential views go hand in hand, as we do need a prudential view on public finances in order to assure having some resources for all the prevention, adaptation and mitigation which will be required.

Two fundamental problems the world faces everywhere now, is the deteriorating environment of the earth and the lack of jobs for our youth. And in this respect for almost a decade now I have been arguing the following:

If we have capital requirements for banks which clear for the information provided by credit ratings, even though that information has already been cleared for elsewhere, and thereby only produces dangerous distortions, why then do we not have instead capital requirements for banks that are based on sustainability of earth and job creation ratings?

The above would allow banks to play a significant role in solving both problems, without us having to leave the financing of environmental or job creation projects in the hands of government bureaucrats or short terms political interests. Unfortunately there are some who prefers the government to solve it all… seemingly that is on their agenda.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has told me not to send him anything more about these “capital requirements”… he already knows it all, at least so he thinks.

We need to see the hiding-behind-regulatory-risk-weighting index of the banks

Sir Patrick Jenkins and Daniel Schäfer at the end of their “Banks in cash calls to meet Basel III” state the caveat with respect of the numbers shown that “Regulators [will] either raise risk-weightings and/or give more emphasis to nominal balance sheets.” Indeed, but it can also be, like the current crisis has clearly evidenced, that the risk-weights could also simply turn out to be very wrong.

And that is why I consider the illustration that shows Basel III core tier one capital ratios of 12 large banks to be quite opaque. As a minimum, next to each Basel III ratio they should have given us each banks capital to nominal balance sheet ratio.

That way, by dividing the first ratio by the second (or the other way round) we can build an index which allows us to identify how each bank hides behind risk-weights, whether these are calculated by themselves or by the regulators.

Was the Basel Committee, and the Financial Stability Board, created in order to bypass democracies?

Sir, what would be the possibilities of passing a law, in any European parliament, which would dramatically increase banks expected risk-adjusted returns on equity when lending to a sovereign or triple-A rated borrowers, and thereby stop banks from lending to those perceived as more risky, like small and medium businesses and entrepreneurs, or having these pay higher interest rates to make up for a regulatory competitive disadvantage; and all justified with the argument of making banks safer? None I would say… especially if a parliamentarian reminded law makers of the fact that no bank crisis ever has resulted from excessive lending to those perceived as risky, they have all resulted from excessive lending to what was wrongly perceived as absolutely safe.

But that is exactly what the Basel Committee has achieved by imposing their capital requirements for banks based on perceived risk. And this is why I do not agree much with Philip Stephens’ “Do not blame democracy for the rise of the populists” May 10, since democracies should never have allowed their power to be diffused in such a way. Governments and democracies are now in many ways kept hostages by their own creations... and suffering their own Stockholm-syndrome 

Was the Basel Committee and the  created on purpose in order to bypass democracies? I have no answer to that question… sometimes shit just happens. But, who have benefitted from it? Not “the risky”, that’s one thing for sure.

Regulators, and FT journalists, suffer from cognitive overload and malfunctioning prefrontal cortex.

Sir, Christopher Coker’s “Technology is making humans the weakest link in warfare” May 10 is an extraordinarily enlightening article…among other for understanding why bank regulators are seemingly not able to correct what they should correct.

Coker writes “The digital world we have created may be outpacing our neurons’ processing capabilities [cognitive overload], forcing us to log off emotionally. The neurons associated with empathy, compassion and emotional stability are sited primarily in areas of the prefrontal cortex. In evolutionary terms, this is a recently developed part of the brain that is bypassed when we are stressed or overanxious. Emotions such as empathy and compassion emerge from neural processes that are inherently slow. It takes time to understand the moral dimension of a situation.”

Bank regulators, with the introduction of risk-weighted capital requirements for banks, which much favors access to bank credit for “The Infallible” caused, as collateral damage, that the access to bank credit for “The Risky”, like small and medium businesses and entrepreneurs became, in relative terms, much more expensive and harder to access. In other words the gap when accessing bank credit, between “The Infallible” and “The Risky”, increased dramatically.

And, since “The Risky” includes many or perhaps most of those potentially able to create the next generation of jobs, our young ones are paying dearly the consequences of such odious regulatory discrimination.

Having for years been protesting these regulations, I could never understand why bank regulators (or FT journalists for that matter) did not care one iota about something which in my mind could even be labeled as a crime against humanity. Now, thanks to Coker I have at least a clue; they are suffering a cognitive overload, which is causing their prefrontal cortex to stop functioning.

I sure pray they recover soon… or we will have to wait for those regulatory drone-robots which in terms of Coker could at least console us with “reducing the inhumanity so as to balance the loss of humanity”.

Since when can a mistake in a paper be used as evidence of an opposite conclusion?

Sir, Robin Harding reports “Reinhart and Rogoff publish errata to paper on public debt and growth”. May 9. In it Harding writes that the 2010 paper on public debt and growth, by pointing out a significant effect on growth when public debt reached 90 percent of GDP, was widely cited as an argument for fiscal austerity. Since the paper was thought to be correct, I guess that was a quite reasonable thing to do.

What I cannot lay my hands around though is how the existence of a mistake in the paper can suddenly be turned into evidence which supports the opposite conclusion. I say this because I have lately read more opinions advancing that the 90 percent is no limit, than what I ever read about the original paper stating it was.

That said, since all this type of debt-sustainability discussions often sound to me like a torturer debating how much torture his victim can take before fainting… I will, without any religious fervor invested in it, keep on opining that public debt at 90 percent of GDP is high… although that will of course also have to do with who are the holders of that debt, nationals or foreigners, friends or foes.

And also, if the 90 percent to GDP has been reached by incurring in distortions, like requiring banks to have more capital when lending to the citizens than when lending to the government, then my previous “high” becomes a “VERY HIGH”

Higher bank capital ratios without eliminating distortions based on perceived risks, would make banks riskier

Sir, John Plender refers both to the draft legislation advanced by US senators David Vitter and Sherrod Brown, and to Anad Admati’s and Martin Hellwig’s “The bankers’ New Clothes”, in order to point out that “Support is growing for higher bank capital ratios”, May 8.

Plender unfortunately entirely misses what is most important. Many have asked for higher capital requirements but, what sets those he references apart from many others is that they also want to do away with the pillar, and the pride and joy of Basel regulations, namely that the capital requirements are to be based on perceived risk.

Let me ask Plender. Today, according to Basel II, a bank can hold some zero risk weighted sovereign assets against zero capital, while giving a loan to a business requires it to hold 8 percent of it in capital. If tomorrow the risk-weights for some sovereign would remain zero, but banks were instead required to hold 30 percent against a loan to a business, would the distortions be smaller or larger?

Without eliminating regulatory distortions, neither austerity nor profligacy can help Europe

Sir, Martin Wolf writes: “the hope that [the European countries in crisis] will grow their way out of their difficulties, via eurozone demand and internal balancing, is a fantasy, in the current macroeconomic context”, “The German model is not for export” May 8. 

Wolf’s line of argument, again, points to the “austerians”, as he likes to call them, being wrong. I agree with this. But that does not mean that their opposites, let’s call them the “profligates”, would be right either.

Europe, to stand a chance, and the European youth to find the next generation of jobs, needs to get rid of those distortions which direct bank credit, not based on its productivity, but based on perceived risk-avoidance. And before that is done, I would have to be an “austerian”… since wasting away scarce profligacy space on nothing is just plain stupid.

In fact those regulations are more than stupid they might in fact even signify a crime against humanity.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him anything more about the implications of these “capital requirements for banks based on perceived risk”… he already knows it all… at least so he thinks.

It was bank regulators who suffered the mother of all intellectual failures

Sir, John Kay writes that the left, were so horrified that a collapse of capitalism from its own global contradictions, might occur under their watch, that their only thought was to avert it by shoveling public money at the capitalists, “Sinister or silly, protest politicians are united in grievance” May 8. And Kay refers to that as an “intellectual failure”.

That is indeed true, but, as intellectual failures come, much worse was the one which preceded it, namely the regulatory theory that banks would be better off diverting their credits from what though perhaps productive was perceived as risky, and concentrate on earning high returns on their equity by giving credit to what was perceived as “absolutely safe”.

Capitalism might have contradictions but, allowing banks to leverage their equity 62.5 to 1 when lending for instance to Greece, but only 12.5 to 1 when lending for instance to a German medium sized business, has of course nothing to do with that.

In fact those regulations are more than stupid, they might in fact even signify a crime against humanity.

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

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

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

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

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

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

The best way to compete with tax havens and fiscal paradises abroad is to create tax heavens and paradises at home.

Sir, Vanessa Houlder writes that with respect to tax avoidance “Governments are complicit in the problems they are condemning. It is their tax systems that has created incentives for businesses to behave that way”, “Talk is cheap in the clampdown on tax avoidance” May 4. And she is more correct than what she probably knows. I have always held that the best way to compete with tax havens and fiscal paradises abroad is to create tax heavens and paradises at home.

Also considering the enormous growth in fiscal income and the relative poor delivery of services, like the costs of any government financed infrastructure going to the roof, we might be reaching the point in which governments become too-big-to-govern, and in which case some escape valves could prove to be blessings in disguise. For instance, once the air cleans in Greece, private Greek capital safeguarded abroad might prove indispensable for the survival of Greece.

FT, how can you learn if you do not want to listen?

Sir, in your editorial “US spring fails to spread to Europe” May 4, if it could really be called a “spring”, you write “fixing the banks to help the recovery is the lesson Britain and the eurozone must learn from the US.”

The real difference between the US banks and your banks is that the former never fully implemented Basel II and are therefore much less exposed to the distortions the capital requirements for banks based on perceived risks already cleared for elsewhere cause.

But since that is precisely what I have written you more than a thousand lettersabout, but that you have preferred to ignore, I must then ask… how are you suppose to learn if you are not even willing to listen?

Frankly... who has such silencing powers in the Financial Times?

Bank regulators make the prospects of the living-hand-to-mouth especially bleak

Sir, Gillian Tett’s “The cost of living hand-to-mouth” May 5, is splendidly scary, especially when contrasted with all the how the US is doing great hoopla on FT's first page… especially since there is nothing in the “for our business it has become critical to understand the cycle – when pay [and benefit] cheques are arriving” that will increase the relative number of citizens who can afford a planning scenario that goes further than next pay cheque.

Of course, as Ms Tett has preferred to ignore it, even if she writes for the Financial Times, I must remind her again of the fact that if any of these “living hand to mouth” were to have access to bank credit, then the dollars, or pounds, or euros they would pay in interests, would be worth much less to a banker than those dollars, or pounds or euros paid by anyone dressed up as safe. And that is simply so because the regulators allow the banks to leverage much more a “safe” dollar, pound or euro, than a “risky” one.

Of course, as Ms Tett has preferred to ignore it, even if she is an anthropologist, I must remind her that one big reason many have possibilities of planning for a longer horizon, is that so many before them took many risks, assisted by the banks. And therefore, as a result of banks daring taking risks having been ordered out of fashion by too concerned and too dumb regulators, the future of the current living-hand-to-mouth looks especially bleak.

No nation and no economy has become great by playing it safe!!! God make us daring!!!

Distortion is not free, current low public interest rates are an illusion and could be the highest real rates ever

Sir, during the two years I had the fortune to have a voice as an Executive Director at the World Bank, 2002-2004, there were a lot of discussions on the issue of debt sustainability for poor developing countries. I hated those. They always sounded like a torturer calculating how much he could go on before his victim fainted. No doubt much of the ongoing, and I would have to say much less civilized debate between the austerians and the profligarians, reminds me of that.

And I also remember when some years ago some environmental austerians fouled up some research, which was immediately interpreted as a great go ahead by the environmental profligarians.

I do pity Kenneth Rogoff and Carmen Reinhart, for probably having been too interpreted by vested interests, hand having to end up in the eye of the current storm on debt. They do a good job of fixing their positions in “Austerity is not the only answer to a debt problem” May 2. Of course it is not a question of either or… and it is not even necessary for them to call on Keynes to testify in their defense.

That said, what they entirely miss, probably because it has never been an area of research or concern to them, is how current bank regulations, which so immensely favor sovereign borrowings, leads to the illusion of low rates.

Just one example: Banks in Europe lending to Germany do not need to hold any capital, something which implies an authorized infinite leverage of their equity. But, if they lend to a German small or medium business or entrepreneur, then they need to hold 8 percent in capital and can only leverage the risk-adjusted returns of that loan on their equity 12.5 times to 1. 

Anyone who does not understand that translates into a direct subsidy of Germany´s borrowing rate, paid by taxing the more “risky” and the real economy losing out of opportunities, has little idea about how banking and capitalism work. 

If some real game changing opportunities are thereby lost by Germany, it could in fact currently, and quiet unwittingly, be paying they highest interest rates ever on their public borrowings.

On the Battle between “Austerians” and “Profligarians”

Sir, Martin Wolf refers sort of contemptuously to “austerians”, to whom he holds “a financial crisis is a mark of moral turpitude, to be redeemed only by suffering. “Why the Baltic states are no model” May 1.

But Wolf himself could also with moral turpitude equally be accused of being a “profligarian” in holding that a financial crisis should only be redeemed by just letting the party go on… in the best style of an Après moi, le déluge baby-boomer’s perspective.

Before the worst type of austerity is eliminated, namely that which hinders banks to take the real risks the real economy demands, I find myself definitely to be an “austerian”, because otherwise fiscal and monetary profligacy would just be a waste of fiscal and monetary space.

Now, once the regulatory establishment has come to its senses, God willing, and eliminated the current capital requirements for banks based on risk-weighting for perceived risks which have already been weighted, by means interest rates, amounts of exposure and other terms, then I will gladly think of joining the camp of the profligarians. I said “think” because I would need to be sure regulators really understood how dumb they had been, so as to never again repeat similar nonsense.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has told me not to send him anything more about the implications of these “capital requirements for banks based on perceived risk”… he already knows it all... at least so he thinks.

Risk-weighting for risks already weighted for, well that is regulatory zealotry you can write home about

Sir, you write that “the Fed’s monetary policy [is] much more efficient than in those economies where the transmission of central bank money-printing to real economy remains broken” “If the Fed ain’t broke, don’t fix it” May 1.

Indeed but the reason of that is that the US never adopted as fully as Europe did those Basel dictated capital requirements based on perceived risk, that so completely have clogged up the channels whereby bank lending can flow to the real economy.

And when you refer to that US Senators Sherrod Brown and David Vitter want banks to hold more capital you are ignoring that their bill contains the much more important provision of limiting [and hopefully making away altogether] with the obnoxiously dumb risk-weighting, something that is not explicitly mentioned in the Dodd-Frank law.

Sir, you mention the dangers of “zealotry”. Let me inform you that the worst example of regulatory zealotry is precisely the setting of capital requirements based on perceived risks that have already been cleared for.

Sir, as I wrote in a letter published today by the Washington Post, “Europe would also do better with a Brown-Vitter proposal”