Regulation distortions, sure makes finance information on banks extra hard to grasp.

Simon Samuels writes about bank financial reports of 600 pages, “Too much information makes finance hard to grasp” April 25.

Sir, since the 2007-08 crisis, I have read at least 50 editorials, articles or research papers, written by first class newspapers, experts or renowned academicians, that have compared the capital to assets ratios of banks of before the 90s, with the capital to risk weighted assets of the Basel I, II and III… in order to show how bank capitalization has evolved.

In fact even prominent regulators have fallen in their own trap.

For instance in this letter I pointed out the mistakes of Alan Greenspan.

Besides, what’s the use of risk weighted capital to asset ratios if no one understands what the risk weights are and how these came into being, like for instance the zero percent for sovereigns?

Sir this is the prime example of how regulation has distorted information and makes the finance information on banks hard to grasp.

PS. Do you want me to review my blog and count the times FT and its people got it wrong but ignored my letters on it?

PS. By the way in my letters I have found that Simon Samuels, related to the Financial Stability Board, seemingly has not much against the concept that regulators should act as risk managers for the world. Boy it does takes a lot of hubris for that! 

@PerKurowski ©

Is there something like a “not with the banks in my backyard” syndrome that blinds?

Sir, Tim Harford discusses “How to manage industrial decline” April 23.

In my mind the golden rule is that the sooner you find its substitutes, the less you have to go through the convulsions of managing it.

But how on earth do we explore new opportunities when bank regulators have decided to deny explorers like SMEs and entrepreneurs fair access to bank credit, just on account that these are risky?

It is truly hard for me to understand how who has written “Adapt… why success always starts with failure” is not up in arms against the risk weighted capital requirements for banks.

Could it be some “not with my banks in my backyard” syndrome? NWMBIMBY?

As for the “give them money… a topic for next week” I sure hope to see something about a Universal Basic Income scheme… I mean we have more than enough redistribution profiteers.

@PerKurowski ©

The crash was not caused by casino capitalism but by bank regulators who manipulated the odds at the casino

Sir, Simon Schama writes of “a crash engineered by the worst excesses of casino capitalism”, “New revolutionaries generate much heat but little action” April 23.

That “casino” reference is so utterly wrong!

In roulette, absolutely all bets have the exact same expected value, and if not so, there would be no casinos in which to play roulette.

In the same way all bank credits used to have the same expected risk adjusted return. That is, before regulators came up with the risk-weighted capital requirements for banks. By allowing banks to leverage their equity more with what was perceived, decreed or concocted as safe, than with what was perceived as risky, suddenly banks made higher expected risk adjusted profits with The Safe than with The Risky.

It was that manipulation of the odds, which promoted the “safe” like AAA rated securities, sovereigns like Greece and mortgages, that caused the crisis 2007-08.

And it is that manipulation of the odds, which hinders the access to bank credit of the risky like SMEs and entrepreneurs that blocks the road for an effective recovery.

All other manipulations like that of Libor put together have not caused even a fraction of the damages the full of hubris and besserwisser manipulating regulators have caused.

@PerKurowski ©

Cement generates carbon - tree stores carbon. Is that something for houses in China?

Sir, I refer to Gillian Tett’s “Can China’s buildings turn green?” April 23.

What I have understood talking with friends who might just be besserwissers as unknowledgeable on these matters as I am; China uses a lot of concrete when building, and cement generates massive amounts of carbon. If they built more houses with tree then they could instead be capturing carbon.

Is it so? Who knows, in the fight against climate change, we must be very careful, there are many climate change profiteers.

And that, to keep profiteers away, is why I am supporting a big tax on gas, distributed by means of a Universal Basic Income. That would also align the incentives in the fight against climate change with those in the fight against inequality.

@PerKurowski ©

What pay rules can we impose on regulators who insist on distorting the allocation of credit to the real economy?

Sir, you write “US federal regulators this week proposed new pay rules intended to limit excessive risk-taking” “Investment banks can endure tougher times” April 23.

Time again to understand what “excessive risk-taking” is being referred to.

One thing is the risk of dangerously large exposures to what is perceived, decreed or concocted as safe, and which allow for very small capital requirements. Those were the risks that caused the 2007-08 crisis, AAA rated securities, residential housing finance and sovereigns like Greece.

Another thing is the risk of the risky, like SMEs and entrepreneurs. These risks, because they generate higher capital requirements, are risks not sufficiently taken, and the economy suffers from that.

Do regulators really know what “excessive risk-taking they want to limit? I seriously doubt it. The “more-risk less-pay” and the “less-risk more-pay” is just the typical kind of intervention that brings on unexpected consequences.

More-risk more-capital less-pay. Less-risk less-capital more-pay. We will all end up suffocating in some over-populated safe haven!

It is obvious, at least to me, that the greatest current source of risk to the banking system, and to the economy, are the risk weighted capital requirements for banks, which so distorts the allocation of credit. Are there some pay rules on regulators we could apply?

@PerKurowski ©

The risks with the risk weighted capital requirements for banks distortions' are much larger than those of a Brexit.

Sir, Bank of England’s mandate is to “promote the good of the people of the United Kingdom by maintaining monetary and financial stability” and therefore Chris Giles holds that “The Bank of England needs to speak up on Brexit” April 21.

But there you have BoE steadfastly supporting the Basel Committee’s risk weighted capital requirements for banks, which so dangerously distorts the allocation of bank credit to the real economy.

The merchant bankers that helped England prosper would currently not be able to do so, because all they would be doing, like the rest of banks, is investing in public debt and residential mortgages or lending to some AAArisktocracy.

Now you do not have banks that finance the riskier future, they only refinance the for the short time being safer past.

Frankly, when compared to that regulatory reality, the risks with Brexit, though these could be large, sound minor to me.

Few months ago Stefan Ingves, the current chair of the Basel Committee, innocently used the story of an infamous Swedish warship, the Vasa, in order to illustrate the work of the Basel Committee. Ingves is totally unaware of how applicable that story still is. 

@PerKurowski ©

FT, for you is an English Language Empire, a too attractive or a too contemptuous idea?

Sir, even if soon two decades ago I wrote an Op-Ed titled “A new English Language Empire” that does not mean I have suggested such thing.

That said I do not understand why, even though you qualify it with that Obama “does not have to spell it out explicitly”, you argue he should “legitimately make it clear that a post-Brexit UK will not be able to rely on an alternative transatlantic or Anglospheric framework of trade and security to replace its connections with Europe.” “Obama tells home truths over the EU referendum” April 21.

Is it because you might feel such possibility could be dangerously attractive and therefore stimulate a Brexit, or is it because you find such possibility contemptuous?

I do not come from an English speaking country but, if Englishman, and if Brexit happens, then I would certainly look with interest at the possibility of a Brentrance into such an Empire.

PS. If Brexit, should EU have the right to keep English, or do you see a fight breaking out between German and French? 

@PerKurowski ©

If there is a Brexit, will EU throw out English and adopt German or French or Spanish as its main language?

Sir, I refer to Martin Wolf’s “Britain’s friends are right to fear Brexit” April 20.

I reread it several times, and of course, if it is Brexit, and nothing more, then UK has the right to be very concerned about the consequences. But, it doesn’t have to be that way.

For instance Britain could try to explore the possibilities of strengthening the bond that the English language represents. For instance when Wolf remind us of how “US resources and will sustained the west during the second world war and the cold war”, I have to ask myself if that was more because of Europe, or because of England, and frankly I do not really know the answer.

Also Europe itself suffers severe existential problems. As you Sir and Martin Wolf know, I believe that the risk aversion implicit in the risk weighted capital requirements for banks basically amounts to a decision to lie down and die. And so if Brexit would come hand in hand with a Baselexit, then surely UK would come out as a winner.

Wolf is right that the UK would always have the option of existing the EU, but our kids and our children cannot afford to wait for better possibilities to find jobs that those lousy bank regulations permit.

As with the wall Trump wants to build, you are never ever really sure on which side of it you rally want to find your family.

PS. Linguistic determinism is the idea that language and its structures limit and determine human knowledge or thought, as well as thought processes such as categorization, memory, and perception.

PS. By the way could EU keep as its main language a language of a non-member? J

PS. During my two-short-long years as an Executive Director of the World Bank, I don’t recall a more enjoyable moment than listening to a colleague, the Executive Director for France, Pierre Duquesne's wonderful spirited defense of the budget allocation for translating English documents into French. Languages are indeed of utmost importance to some.

@PerKurowski ©

The way sophisticated states regulated their banks, meant that their real economies should lie down and die.

Sir, Jan Techau writes that “to have a functioning state in which nothing gets done” is a “Sophisticated state failure cancer eating away at societies in the west and undermining the liberal world order ”Sophisticated states are failing, so politicians need to take risks” April 20.

Indeed, but sometimes to have a state that does nothing, or at least less, could also be very helpful.

For instance, bank regulations coming out of the Basel Committee, are undermining our economies. Regulators believe that in order to make banks safer, they should hold more capital when lending to The Safe than when lending to The Risky. And that translates into that banks can earn higher expected risk adjusted returns on equity when lending to The Safe than when lending to The Risky.

This is something which completely distorts the allocation of bank credit to the real economy, and stops the banks from financing the riskier future, causing these to only engage in refinancing, the for the short time being safer past.

In other words they instruct our economies to lie down and die.

And to top it up, to speed up the dying, they imposed a mindboggling statism, which is reflected in that they defined the risk weight for the sovereign to be zero percent, while the risk weight for the citizens that give the sovereign its strength, was set at 100 percent.

I swear to you, if banks had not been regulated, the market would for instance never ever allowed European banks to leverage their equity 50 times or more.

Who did the Eurozone in?

@PerKurowski ©

The World Bank should object IMF’s support of bank regulations that hinders development and promotes inequality

 Sir, you opine that “Crisis lending should be the job of the International Monetary Fund” “Mission creep must stop at the World Bank”, April 20. 

I am not familiar with the cases of Nigeria and Papua New Guinea, but the way you argue it, you most certainly seem to have a point. That said I am not sure that China’s bilateral lending and the new Asian Infrastructure Investment Bank should be taken as direct substitutes for the World Bank in providing development finance. 

But we can also argue that IMF, by supporting the very bad bank regulations coming out of the Basel Committee, has also overstepped its boundary. Let me explain. 

In order to make banks safer, regulators now require banks to hold more capital when lending to The Risky than when lending to The Safe. 

That means that banks will be able to leverage more their equity when lending to The Risky than when lending to The Safe. 

That means that banks will be able to earn higher expected risk adjusted returns on equity when lending to The Risky than when lending to The Safe. 

That distorts the allocation of bank credit to the real economy, favoring with too much credit at too generous conditions The Safe, and causing The Risky to have too little and too expensive access to bank credit. 

That perceived, decreed or concocted as “safe” is sovereigns, residential housing and the AAArisktocracy. That perceived as “risky” are unrated citizens, SMEs and entrepreneurs. 

And since risk-taking and the efficient allocation of credit are essential elements for development, IMF is helping to make the World Bank’s mission of combating poverty, that much harder. 

And one day the IMF will also discover those regulations are bad for its own mission of promoting financial stability. The 2007-08 crisis was entirely caused by The Safe. 

And by denying “The Risky” a fair access to the opportunities that bank credit can provide, those regulations also promote inequality. 

Sir you also write that the World Bank “should switch much more of its energy towards plugging the real holes in development, the provision of ‘global public goods’”. 

Yes, and speaking out loudly against these truly lousy bank regulations is long overdue. 

In March 2003, as an Executive Director of the World Bank I formally stated: “The sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies will introduce serious and fatal systemic risks into the world, is by having an entity like the World Bank stand up to them—instead of rather fatalistically accepting their dictates and duly harmonizing with the International Monetary Fund.” 

And in April 2003, also as an ED, I argued: “In the Basel Committee’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. The World Bank seems to be the only suitable existing organization to assume such a role." 

I am still waiting! 

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

God make us daring!

The “risk” appetite that caused the 2007-08 crisis was for AAA-rated securities, residential mortgages and sovereigns.

Sir, Laura Noonan quotes Bank of England’s Andrew Haldane with: “I think the risk culture, not just from the regulator but from financial firms, is much different [than before the crisis], the risk appetite is much diminished.” “WEF group issues urgent call for fintech forum” April 19.

What risk appetite before the crisis? Was there any excessive exposure to something that was not perceived, decreed or concocted as safe? No, of course not!

In Basel II regulators assigned a 35 percent risk weight to residential mortgages; AAA-rated securities backed with mortgages to the subprime sector carried a 20 percent risk weight; and the risk weight for sovereigns rated like Greece, hovered between 0 and 20 percent.

Now, soon a decade later, regulators seemingly still think that ex post realities and ex ante perceptions are the equivalent. They keep on thinking that the expected is a good basis for estimating directly the unexpected.

The worse risk to a banking system derives from excessive exposures; and those excessive exposures are always built up with something ex ante perceived as safe… but which ex post could perhaps be risky. And that is currently made much worse, by the fact that those “safe exposures” require the banks to hold the least capital.

So NO, in terms of dangerous excessive exposures to “the safe” I would, contrary to Haldane, hold that the real appetite for real bank risk has not stopped growing for a second, it has even accelerated. 

Sir, again, for the umpteenth time, in Basel II the regulators set a 150 percent risk weight for assets rated below BB-. How on earth can anyone justify that assets that when booked carry a below BB- rating, are riskier for the banks than all other 100 percent and below risk weighted assets?

And how is it that, even after the evidence of the 2007-08 crisis, they still believe so? It is mind-boggling to me… and it should be to you too Sir.

Something is truly rotten in that mutual admiration club we know as the Basel Committee for Banking Supervision.

@PerKurowski ©

FDIC’s Thomas Hoenig is miscast in his current role. Standing up for “The Risky” he would achieve much more

Sir, I refer to: “Corporate person in the news: Thomas Hoenig: A US ‘sentinel on the front lines of the banking system’” April 16.

It states: “In 2010 Hoenig cast eight consecutive dissenting votes against the easy money policies of “quantitative easing”, arguing that they could pave the way for another crisis.”

That to me sounds like a man of character that would do much better if representing the totally unrepresented “risky” bank borrowers; like the SMEs and entrepreneurs.

If he did that, it would be easier for him to understand how absurd it is allowing banks to hold laughingly little capital against some assets, only because these have been perceived, decreed or concocted as safe. Representing The Risky he would be able to argue: “We have never ever caused a major bank crisis. That has been entirely the doings of those ex ante erroneously perceived as safe”

If he did that he would have understood that the strongest argument for banks holding more capital, is the discrimination the little capital required when lending to The Safe causes against The Risky’s access to bank credit.

And had he been able to get rid of the minimalistic capital requirements for the safe assets then, as a big bonus, he would have helped to get rid of the most important growth hormone for the too-big-to-fail banks.

And many, especially the young, would love him. By combating that credit risk aversion so anathema to the Home of the Brave and that is diminishing its economy, he would have helped to restore that risk taking that made America great… and so help create a new generation of jobs.

@PerKurowski ©

Tim Harford, what about bank regulators’ wrong use of statistics? Is it lies, bullshit or just plain stupidity?

Sir, Harford discusses statistics, lies and bullshit in “How politicians poisoned statistics” April 12.

But what would he call the use of fairly good statistics in an absolutely imperfect way? More than lies or bullshitting, it would seem to me that could be sheer stupidity.

The regulators, in order to make banks safe, they did not care about anything else, decided that their pillar would be the risk-weighted capital requirements.

And to apply it they looked at the risk of the different assets… but ignored to analyze the risk those assets could pose to banks.

And so they set the highest capital requirements against those assets that would least cause a major bank crisis, namely those perceived as risky; and the lowest capital requirements against those assets that always represent the greatest danger of excessive exposures, namely those perceived as safe.

And so banks, naturally, since they could leverage more with safe assets, and thereby earn higher expected risk adjusted returns with safe assets, created excessive exposures to for instance sovereigns like Greece or to AAA rated securities. And, when shit hit the fan, they stood there with very little capital to cover themselves up with.

And so banks, naturally, had less than ordinary exposures to the risky, like to SMEs and entrepreneurs, and so the economy started to slow down. And what poses a greater danger to the stability of banks than a bad economy?

So Harford how would you qualify that? Lies, bullshit or sheer stupidity? Or do you prefer to go undercover on this?

PS. Of course those statistics that came up with a zero risk weights for sovereigns were loony to begin with. 

@PerKurowski ©

Is not graduation time a bit late to inform students: “There is more to university than money”?

Sir, Nancy Rothwell, the president and vice-chancellor of the University of Manchester, writes: “Each year I tell graduating students that if they leave university with only a degree and greater “earning power”, I consider we have failed them. A university experience should be about so much more than this.” “There is more to university than money” April 16.

Absolutely! But is not graduating time a bit late to disclose that? How much debt would students dare to take on in order to pay the tuition fees, if the request of admission papers contained a: “Warning, universities are more than about making money”.

By the way, has there recently been some academic research on the evolution of the remuneration of professors? These Piketty days, it would be interesting to see how that has evolved.

In 2007 I argued that higher education should be more of a joint venture between professors and students. Of course I did not mean all the professors’ salaries were to be based on the earning powers of students. As I said, I fully agree that universities are much more than that, but, some better alignment of incentives, seems to be much called for.

It would seem that just like easy house financing translates into higher house prices, easier education financing just translates into higher tuition fees. But, I may be wrong, so as I said research is needed… any papers coming up on this?

PS. Someone commented. "There must be a little sadism involved here, since graduation time is precisely when students most begin to think of money."

@PerKurowski ©

Tett, get it! What is stashed away in offshore centers, is mostly titles of ownership to onshore assets

Sir, Gillian Tett writes: “Four years ago, activists’ group… claimed that some $21tn-$32tn was being stashed in offshore centres, but it had no real way of verifying the numbers. With the Panama Papers being studied, more precise figures could emerge — and with that the ability to compare them with the overall picture of global banking.” “Our mental map of the banking world may be about to flip” April 16. 

Does Tett really think that $21tn-$32tn could be stashed in offshore centers? Has she ever heard of banks in offshore centers to be jointly as large than perhaps all the 15 largest non-Chinese banks put together? Does she not realize that Mossack Fonseca is just a big law firm?

In truth, save perhaps one apartment here, or some yacht there, nothing real is stashed away in Panama or other offshore centers. What is stashed away there though, are titles of ownership over assets stashed away primarily in the developed world. It could be deposits at Citibank, a title over a flat in London, stock certificates or whatever.

The whole affair reminds me of the confusion about Eurodollars that made many sudden-experts believe in the existence of some autonomous dollars traded in Europe. What was traded, were all dollar deposited in the USA. That had started in the late 50s when Russia, scared of the possibilities of having their dollars confiscated, had a British chartered bank take over its dollar deposits in the USA, against a “Eurodollar” deposit of Russia in the British bank.

But does it all not sound nice? Over there are $21tn-$32tn stashed away, and so if only we got it back, we would all be so much better off. Sir, Tett is unknowingly helping to feed that cheap populism that has all redistribution profiteers salivating. I truly think we all deserve better.

PS. Does this mean I condone less than anyone else those criminal activities that might often be behind the hiding of the real ownership of assets? Of course not! And you know it!

PS. Redistributing wealth is not as straightforward as redistribution profiteers want us to think.

@PerKurowski ©

Bank credit should flow to where it most benefits the economy, but regulators only care about avoiding credit risks

Sir, Minouche Shafik, a deputy governor of the Bank of England writes: “We need to make sure the parts that are growing are safe and sustainable so that globalization evolves in ways that direct capital to where it has the most benefit for the world economy” “Globalization is changing, not going into reverse” April 15.

Of course she is right. The question though is why then do regulators insist with their risk weighted capital requirements for banks? These have absolutely nothing to do with directing credit to where it has the most benefit for the economies. These have only to do with having banks avoid lending to those ex ante perceived as risky. And of course that distortion of credit allocation does nothing to promote financial stability, as it only guarantees that those perceived, decreed or concocted as “safe” will get too much credit, while those perceived as risky, like SMEs and entrepreneurs, will get too little.

Worse yet, since major financial crisis never ever detonate because of excessive exposures to something perceived as risky, but always because of excessive exposures to something erroneously perceived as safe, that regulation just makes it all worse, since the banks, when suddenly caught with their pants down, will then have especially little capital to cover up with.

Bank regulations need a complete overhaul. And that begins with asking regulators what is the purpose of banks, to see if we agree.

PS. When will finance ministers dare to ask the regulators The Question?

@PerKurowski ©

We are suffering from a well-disguised creative financial statism of monstrous proportions.

Sir, Dan McCrum writes: “it seems so inherently weird for about a third of debt issued by governments in the developed world to be bought and sold at negative yields” “Negative rates reverse assumptions about financial decisions” April 15.

Not weird at all: a) take away all central banks purchases of public debt with QEs, which helped to keep the saving glut intact or even increase it; b) get rid of regulations that assign the lowest risk weights and thereby the lowest capital requirements for banks to the borrowings of the sovereign monarch; c) stop what McRum mentions about “pension funds and insurers [having to] buy safe government debt irrespective of the price; and d) stop central banks from paying negative returns… and you would not see public debt bought and sold at negative rates.

What we are really suffering from is a well-disguised and utterly creative and non-transparent financial statism of montrous proportions.

The cost of all that is partly borne by savers and future pensioneers, but primarily by our children and grandchildren since the real economy will not grow as it could, consequence of all the credit opportunities denied “the risky” SMEs and entrepreneurs

@PerKurowski ©

Beware of revolving-doors public-projects’ managers who are neither public servant nor respond to private ownership.

Sir, let me see if I understood what Martin Wolf has written in “The public sector needs to be better at accounting for its assets” April 14.

Number one Wolf holds that you should not focus on solely on one dimension, like on net public debt, but that you need to consider the overall performance of government, including the management of assets. I could not agree more. That is why for soon two decades I have insistently argued that bank regulators should not focus solely on avoiding bank failures, but need look much more at the role banks should play in the allocation of credit to the whole economy.

Then Wolf argues the importance of not to reduce public debt by passing along projects, like infrastructure, or sell off assets, like student loan books, to parties who by definition have a much more expensive funding. Again I could not agree more. In my country Venezuela, I even saw privatizations of public services designed to provide the government with huge windfall incomes, leaving the citizens saddled with the need to during decades pay exorbitant tariffs for such services.

And Wolf mentions a recommendation of the Growth Commission of the London School of Economics related to the need for “independent and professional identification and evaluation of public sector infrastructure programs.” As long as you make sure the selection of the evaluators is objective and independent, who could argue with that?

But then Wolf brings up a recommendation expressed by Dag Detter and Stefan Fölster in their book “The Public Wealth of Nations” that though the “ownership of assets does not need to be private… existing public wealth needs to be professionally managed"

And here I intuitively disagree.

Either good public servant, as good public servants, manage public project professionally, or they should be managed by good private professionals responding to the incentives and the responsibilities that comes with ownership. The professional manager who is neither a public servant, nor an owner, nor responds to owners, is precisely the sort of unaccountable breed we best stay away from. Those are the ones usually trafficking the so-called revolving door between government and the private sector.

PS. For good government transparency, I would add the need to separate ordinary government functions from its assumed redistribution functions, so as to have a clear idea of how much the redistribution costs, and thereby keep the redistribution profiteers at bay.

@PerKurowski ©

All economies need a good volume of pleasant surprises to grow. Bank regulators are now blocking these.

Sir, Olivier Blanchard writes that the reason for the surprisingly weak growth response to extraordinary stimulus, “must be found in mediocre medium term prospects”, “Slow growth is a fact of life in the post-crisis world” April 14.

If you advance bad news and do not allow risks to be taken, you cannot but guarantee mediocre term prospects”. And that is what bank regulators did.

In a very simplified way below are the four possibilities with respect to ex ante perceived credit risk and ex post outcomes.

Something perceived safe turns out safe. No surprise.

Something perceived safe turns out risky. Bad news.

Something perceived risky turns out risky. No surprise.

Something perceived risky turns out safe. Great news.

It is always what is perceived as safe but that turns out risky, which poses the greatest dangers to financial stability.

And it is always what was thought as risky but turns out safe, which most gives the economies the impetus to move forward.

But what did the regulators do with their credit risk weighted capital requirements for banks?

They guaranteed that if something safe turned out risky, banks would have very little capital to cover up with.

And they made sure banks would not risk delivering the good surprises our economies need.

No Mr. Olivier! Slow growth has not to be a fact. God make us daring!

@PerKurowski ©

The current low interest rates on public debt are completely artificial.

Sir, again, for the umpteenth time, Martin Wolf finds it “hard to understand the obsession with limiting public debt when it is quite as cheap as it is today” “Negative rates are a symptom of our ills” April 13.

But again he refuses to delve into why public debt is “as cheap as it is today”. Where would interest rates on public debt be without central banks buying public debt; or without regulators allowing banks to hold much less capital against the debt of the monarch, than against all other debts?

Wolf also brings up a frequent ritornello of his, namely that “The world economy is suffering from a glut of savings relative to investment opportunities.” But he does not ask himself where that saving glut could be had it not been for QEs.

Wolf informs us that higher interest rates, “would force borrowers into bankruptcy”. Yes but is that not a natural and necessary element of how savings glut are reduced? In a letter titled “Long-term benefits of a hard landing” that FT published in 2006, I wrote: “the hard truth… gradualism could create the most accumulated pain… [do not] ignore the value of pruning or even, when urgently needed, of a timely amputation.”

Wolf’s standard suggestion for how to eliminate the savings glut is having government investing in infrastructure. Nothing’s wrong with that, good infrastructure is always useful, though any waste building it, is just that, waste.

But building bridges does not mean these will be used. And how are we to make sure we get the new investments that will use the infrastructure built, with risk weighted capital requirements that make banks stay away from what perceived as risky? What we now have is a banking system fully dedicated to solely financing what is perceived, decreed or concocted as safe.

For a government to take on public debt should be a delicate matter, knowing that it is our children and grandchildren who will have to service that debt. To do so based on some artificial current low rates is not something I can support.

PS. With a $2 per gallon gas tax the US could pay each American citizen about $900 per year. Good for the fight against climate change and inequality, and fairly decent for the economy. That would be a good start for a Universal Basic Income scheme, which I much prefer over Helicopter money, first because it is duly funded, and second since I do not fully trust the helicopter pilots  J     

@PerKurowski ©

Among all that regulatory complexity, when are regulators to tell us what they think the purpose of banks is?

Sir, John Kay writes on banks: “Complexity is the enemy of stability… [it is] compounded by the regulatory complexity that follows from attempts to monitor behaviour in impossible detail… legislators cannot hope to have more than a basic knowledge of the rules they promulgate or the workings of the regulatory institutions they have created.” “Complexity, not size, is the real danger in banking” April 13.

That is a fair description of what is happening and we can only lament the incredible amount of new complications the regulators are spitting out with such gusto.

What astonishes me though is that legislators do not have the wherewithal to at least answer the question: “What do you believe is the purpose of banks?”

Sir, again, I am convinced that with their credit-risk weighted capital requirements, the regulators demostrate they do not give one iota about how credit is allocated to the real economy. And to do that well, with reasoned audacity, as I see it, is the most important function of banks.

PS. To allocate the most of bank credit has nothing to do with alocating credit in the best way. In fact often the best credit, is that not given. 

@PerKurowski ©

Negative interests make you need deflation to balance your social security plans.

Sir, you mention that “José Viñals, a senior IMF official, has warned that negative rates could become more damaging for society the longer they persist, undermining the viability of life insurers, pensions and savings vehicles.” “Negative rates may be nearing a political limit” April 11.

Of course it does that. More than a decade ago, as an Executive Director of the World Bank I frequently objected to all those documents on Social Security System Reforms that assumed pension funds to obtain real rates of return I felt were unrealistically high for the long term. And to achieve those returns in an environment of negative interests, how much deflation might you need? Clearly, negative interests do not lead to something good.

You write: “Opponents of negative rates need to spell out the alternatives”. But Sir, that is precisely what I have done, in those hundreds of letters that you for whatever internal reasons decided to silence.

And so here it comes again. You mention that negative interests are — “intended to encourage… banks to lend more to the real economy”. But it is not only a question of more lending but also of correct lending. And the risk weighted capital requirements for banks impede these to allocate credit efficiently to the real economy.

How? Again: by allowing banks to leverage more on “safe” assets than on “risky”, the expected risk adjusted returns for safe assets will be higher than those of risky assets, and so banks will lend too much to “the safe” and too little to “the risky”.

And so in order for negative interests, QEs or any other monetary concoction to work, that regulatory distortion needs to be eliminated. Capisci?

@PerKurowski ©

“Listen, do not forget that you are the millenial here, and so you are the one supposed to know”

Sir, Lucy Kellaway, enjoyable as always to read, discusses the jobs of millenials, and recommends managers to give them “something interesting to do, or at least be able to explain why filling in that particular spreadsheet really matters” “Don’t blame millennials if you can’t hang on to them” April 11.

Though that presumes the manager knows why the spreadsheet is filled out, which is definitely not always the case, it sounds like very good advice, something like “wash your hands and brush your teeth”

But if I was a manager confronting a recently hired unknown millenial, one of those who can find it interesting to spend hours on what seems utterly un-interesting actvities to me, I would suggest a more forthright approach:

“Look here young friend, I am giving you these spreadsheets to fill in. Try to figure why, and if you in the process find that something better could be done, tell me. Do not forget that you are the millenial here.” 

@PerKurowski ©

In Miami Florida USA, when stores display “Hablamos inglés”, that evidences the global importance of English

Sir, during my two short/long years as an Executive Director of the World Bank, I don’t recall a more enjoyable moment than listening to a colleague’s, the Executive Director for France, Pierre Duquesne's wonderful spirited defense of the budget allocation for translating English documents into French. And that is why I felt a streak of bad conscience when I caught myself discreetly smiling when reading Jeremy Paxman’s “Voilà — a winner in the battle of global tongues” April 8.

Of course English has won the battle. It is such an important language that even in Miami Florida USA, the stores display signs that read: “Hablamos inglès”, “We speak english”.

What has me a bit surprised though, is that I have not yet heard Mr Paxman suggesting an English Language Empire, as a Brentrance to Brexit.

That Empire would, Professor Higgins allowing, at least save itself most of the costs of translations.

@PerKurowski ©

The Undercover Economist surfaces timely to help put some stop on dangerous divisive demagoguery.

Sir, Tim Harford writes: “If the rich and powerful are dodging taxes or committing financial crime, they deserve to be exposed. And if a $160bn merger makes sense only if it qualifies for a juicy tax break, it should not happen. If politicians and voters are finally taking an interest in closing tax loopholes, that is good… Yet there is also something disheartening about the name-and-shame, patch-and-mend turn the conversation has taken.” ‘Naming and shaming is no way to build a tax system” April 9.

What can I say? I guess: “Hear, hear!” applies the best.

And next week I hope the Undercover Economist helps to explain that what is to be found there in the stash-away is not some unused treasures type Ali Baba and the 40 thieves, but papers that evidences how values have already been deployed, like for instance buying shares or government debt.

I ask this because when we read articles that state “The Panama Papers Show That There's Enough Money to Solve the World's Problems - It's Just in the Wrong Hands”, it is clear that truth is bended in order to serve populism, and that redistribution profiteers are smelling great opportunities for their Rightful Hands.

@PerKurowski ©

Do Gillian Tett and other really believe that ever-growing offshore cash piles, is cash stashed away under mattresses?

Sir, Gillian Tett writes: “overseas profit piles have swelled — to more than $2tn”; and from there she jumps to: “in the real world introducing a repatriation deal — even at a mere 10 per cent — would almost certainly be better than the dismal status quo: a world of ever-growing offshore cash piles, transatlantic tax battles and lousy infrastructure does not suit anybody.” “The clampdown on tax inversions is only a start” April 8.

But Vanessa Houlder informs: “Over $1tn of cash has been booked offshore, even if the money is held in US banks or Treasury bonds.” “Tax havens seen as ‘grease on wheels’ of cross-border trade” April 8.

All those “overseas profit piles” have, in some way or another, already been deployed and so, to redeploy these, means having to liquidate their current positions.

What if the “more than $2tn” had all been invested in public debt and you repatriated all of it and the government got a 10 percent cut on it?

Then of course governments would owe ‘more than $200bn’ less, but if they for instance wanted to better any “lousy infrastructure”, then they would have to sell fresh public debt in the market. And, since the stockpile-holders have been diminished, that would most certainly imply having to pay higher interest rates. That is of course, unless governments are not assisted by banks holding it against zero capital requirements, or central banks buying up public debt for the governments own “stockpiles of cash”.

It is amazing the kind of demagoguery that is floating around. It is dangerously divisive. At the end of the day what it really comes down to, is who is going to decide on how any accumulated wealth is to be redeployed, whether the private or some government bureaucrats.

I truly believe that current governments waste, represents much more lost value than what is inappropriately or illegally diverted into these oh-so-horrible “stockpiles of cash”. And so I would like to see the expected repatriation profiteers kept at bay. Perhaps all citizens in some Universal Basic Income/Wealth scheme could share the governments’ cut of any repatriated assets?

And by the way, what are we to do with Putin’s “stockpiles of cash”, those that might be fully invested in the US? Send it back to Russia to Mr Putin?

Do these comments mean that I condone what distorts or what is illegal? Of course not! All tax systems should be improved and all taxes should be paid! There are occasions though in which I find it quite relevant to ask: How much failed nation or tyrannical government is needed for citizens’ capital to be granted immediate asylum?

Jamie Dimon should consider the long-term interest of his and of JPMorgan’s shareholders’ children and grandchildren

Sir, Ben McLannahan reports on Jamie Dimon’s letter to JPMorgan’s shareholders’. “JPMorgan chief Dimon warns on dangers of undermining US banks” April 7.

In his letter Dimon argues that tougher rules can weaken the competitiveness of US banks, for instance against the Chinese banks. That’s true! Especially in the short-term.

And McLannahan reminds us that “In 2014 Dimon argued that tougher rules would mean that customers faced more expensive credit, or would be denied certain financial products altogether.” That is also true!

But Dimon must also be perfectly aware that current bank capital requirement rules, for when lending to those ex ante perceived as “risky”, are much tougher than those for exposures to the “safe”.

And I refuse to think that Dimon does not know that distorting the access to bank credit in favor of the “safe” government and the AAArisktocracy, against that of the “risky” SMEs and entrepreneurs, only guarantees to sooner or later weaken tremendously the real economy of US. 

And I also refuse to think that Dimon does not know that no US bank should expect to be able to stand solid amid the rubbles of a ruined US economy… not even JPMorgan.

Dimon states: “The US financial services industry does not conform to simple narratives. It is a complex ecosystem that depends on diverse business models coexisting because there is no other way to effectively serve America’s vast array of customers and clients.”

And surely Dimon knows perfectly well, that a complex ecosystem is not made better by regulators who, with much hubris and little wisdom, believe they can help it with their distorting concoctions.

And so Jamie Dimon, instead of writing a letter to JPMorgan’s shareholders considering their short-term interest, should write them a letter that considers the long-term interests of theirs and his own children and grandchildren.

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

God make us daring!

@PerKurowski ©

Mervyn King, for bank regulators to use the expected, as a direct proxy for the unexpected was, and is, radically dumb

Sir, John Plender, March 3, reviewed Mervyn King’s book “The End of Alchemy: Money, Banking and the Future of the Global Economy" And in doing so Plender writes that King argues that in a world of what economists now call “radical uncertainty”, it is not always possible to compute the expected utility of any action. There is simply no way of identifying the probabilities of all future events and no set of economist’s equations that describe people’s attempts to cope with that uncertainty.”

And according to Plender, King proposes a “central bankerly pawnbroking” facility to supply “liquidity, or emergency money, within a framework that eliminates the incentive for bank runs… That would displace what King regards as a flawed risk-weighted capital regime ill-suited to addressing radical uncertainty.”

And John Kay ends his discussion of King’s book with: “There is a world of difference between low-probability events drawn from the tail of a known statistical distribution and extreme events that happen but had not previously been imagined”, “The enduring certainty of radical uncertainty”, April 6.

Hold it there has all that really anything to do with the current risk weighted capital requirements for banks? Absolutely not!

What happened was that since the regulators did not know how to estimate the unexpected losses, those that bank capital is foremost to safeguard agains, they went out and used the expected credit risks. And since those risk were already cleared for by banks, with interest rates and the size of exposures, credit risks, when also used to set capital requirements, were given too much consideration.

And, for the umpteenth time: any risk, even if perfectly perceived leads to wrong actions if excessively considered.

And Plender also wrote about King arguing: “Banks satisfied investors’ desperate search for income by creating increasingly complex and risky financial products based chiefly on mortgage debt. Bank balance sheets grew explosively as property lending ballooned. At the same time, the capital of banks shrank as they took on more risk.

Again that is not really so! The increasingly complex and risky financial products chosen were entirely based on that these could be argued to be very safe, and therefore require banks to hold less capital. For instance mortgage debt would never ever have exploded as it did, if instead of receiving a 35 percent risk weight, it had the 100 percent risk weight assigned to “risky” SMEs and entrepreneurs.

And Plender also wrote about King arguing: “They were trapped by what game theorists call a prisoner’s dilemma. If they retreated from riskier lending and trading strategies while reducing their borrowings, a decline in short-term profits relative to their competitors would have caused staff to defect in pursuit of higher bonuses elsewhere and prompted calls for the chief executive’s head.”

Those “short tem profits” are not some absolute profits, but returns on equity, and so banks, searching for the highest profits, naturally favored those exposures that provided the highest expected risk adjusted returns on equity, in other words those that could be most leveraged.

Sir, I have no respect for a regulator like Mervyn King. He and all his colleagues decided to regulate banks without defining their purpose. Had they done so they would have known, that the most important social purpose of banks is to allocate credit efficiently to the real economy.

Now our banks do not finance the riskier future they just refinance the, for the short time being, safer past.

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

I can understand journalists covering the reputation of old friends… but is that really their role and duty? “Without fear and without favor”… Hah!

@PerKurowski ©

The Basel Committee’s risk weighted capital requirements for banks decreed the ‘new mediocre’, and boosted inequality

Sir you write: “Christine Lagarde, the IMF managing director, has warned that the recovery remains too slow and fragile — and that the world risks being trapped in a “new mediocre” of persistent low growth, with damaging effects on the social and political fabric of many countries.” “The high cost of settling for the ‘new mediocre’” April 6.

If asked: “Is risk-taking essential to the economy?” most experts and all wise men would say “Absolutely!”

And yet regulators de facto ordered banks to stay away from whatever that is ex ante perceived as risky. Because that is what happens when you allow banks to earn higher expected risk-adjusted earnings on what is “safe” than on what is “risky”. Because that is what happens when you allow banks to leverage equity more with what is “safe” than with what is risky.

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

This week William Coen, the Secretary General of the Basel Committee, said in a speech: “We have spent several years developing a framework to make sure that banks' capital and liquidity buffers are strong enough to keep the system safe and sound.” And that describes precisely the problem; they have only cared about the condition of the banks, and not one iota about the fundamental social purpose of banks, which is that of allocating credit efficiently to the real economy.

As is banks will dangerously overpopulate safe havens and leave many promising but “risky” bays unexplored. As is banks no longer finance the riskier future, they just refinance the, for the very short time being, safer past.

And of course, negating the “risky”, like SMEs and entrepreneurs, fair access to the opportunity of bank credit can only boost inequality.

Sir, I cannot understand your, IMF’s, World Bank’s, economists’ and so many others’ silence on this issue. As I see it you should all be ashamed.

One day soon, your sadly unemployed children and grandchildren, will hold you accountable for it.

And don’t tell me I did not warn you. I have sent you way over 2,000 letters on the dangers of arbitrarily imposing distorting risk aversion on our banks, during more than a decade. 

@PerKurowski ©

The fights against climate change and inequality would both benefit much from a Basic Universal Income union

Sir, Martin Wolf, discussing the seemingly accelerating threat of climate change writes: “If carbon pricing were to deliver the desired shifts in investment, it would require credible commitment over the long term. But commitments for the long term can barely be credible.” “Why fossil fuel power plants will be left stranded” April 6.

That really depends on how carbon pricing is structured. The real challenge is to keep at bay the climate change profiteers, be that governments, be that private companies.

In my country Venezuela, were the subsidies for domestic gas (petrol) are monstrously large, but where there is an imbedded resistance to high gas prices, that could be solved if the government paid out all domestic gas revenues directly to the citizens in equal parts… and that at a cost that would not be larger than 2 percent tops.

In the same vein I have also suggested that if all funds derived from carbon pricing, or carbon taxes, were to fund a Universal Basic Income scheme that fights inequality, then all the incentives are perfectly aligned, and it would be politically very difficult to eliminate it.

In fact all the fight against inequality should also proceed with the basic principle of keeping the redistribution profiteers at bay, and Universal Basic Income helps to do that.

An added advantage is that separating the redistribution flows from the taxes needed to fund the governments operations, would bring much added transparency to fiscal matters, and thereby make life more difficult for demagogues.

And of course the resulting flows would help to sustain the demand needed for economic growth.

PS. The Universal Basic Income could also be additionally funded by means of a Pro-Equality Tax

@PerKurowski ©

Would adequate SIFIs’ designations have helped to avert the last crisis? Of course not!

Sir, I refer to Patrick Jenkin’s “MetLife ruling poses threat to drive towards global financial stability” April 5.

Jenkin sounds very much upset: “This is absurd. The FSOC — with its expert mandate and responsibility for “identifying risks and responding to emerging threats to financial stability” — is being torpedoed by an inexpert judge.”

Sir, you know I hold that the regulator, the Basel Committee and friends, was the real responsible for the crisis that errupted in 2007-08. Its risk weighted capital requirements for banks distorted the allocation of bank credit to the real economy, and allowed banks to leverage absurdly much on assets deemed, decreed or concocted as safe… and all this when history clearly shows that “safe” assets is precisely the stuff that big bank crises are made of.

Had the oversized exposures to AAA rated securities and sovereigns to Greece anything to do with what the regulators now tries to catch with their SIFI methodology? No is the simple answer.

In fact working on how to manage SIFI’s, keeps regulators from working on mending their own mistakes. And frankly I see no reason for Jenkins to deposit so much naïve faith in the expertise of FSOC or FSB or any other member of the regulatory logia.

He writes “The time may have come for the G20 to give the FSB proper statutory powers to ensure shortsighted political interests do not put the world on the road to financial ruin once more”

He should know that there is nothing as shortsighted as the risk weighted capital requirements. These have stopped the banks from financing the risky future and have them only refinancing the, for the very short term, safer past.

If anything Sir, I would wish for that “inexpert judge” to also look into whether the unauthorized discrimination against the access to bank credit of the “risky”, which is imbedded in that regulation, should really be allowed in the Home of the Brave.

It is high time the world starts to reflect on whether it really wants to allow an Ultra Important Regulator to introduce, as it wishes and thinks fit, dangerous systemic risks into the banking system.

The absolute minimum we must ask for is for the regulator to first give us its working definition of what is the purpose of our banks, so to see if we agree.

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

@PerKurowski ©

If Britain had applied current bank regulations when it was developing, it might even have found itself below India

Sir, you write: “Even if one puts to one side doubts about India’s economic statistics, private investment remains weak. The government has rightly emphasized improved administration, faster decision-making and greater ease of doing business” and you quote Eswar Prasad of Cornell University ideas with “Markets for land and capital remain distorted. Several public sector banks are in dire shape. They need recapitalization and radical reform”, “Modi fails to exploit India’s great opportunity” April 4.

But again you fail to mention the fact that the Basel Committee’s credit risk weighted capital requirements for banks, which by favoring “the safe” disfavor “the risky”, is as anti-development and pro-inequality as can be.

Do you really think that allowing banks to earn higher expected risk adjusted returns on equity with “the safe” than with “the risky” is the way to go for a country that has not reached sufficient altitude climbing the mountain of development?

And it is not that these bank regulations keep you high up, they also impose a fast descent. With it Britain has expelled its spirited and adventurous risk taking and embraced the risk aversion of the scared.

Hello India, we, Britain, will soon catch up with you, while climbing down.

When the Bible says “But the meek will inherit the land and enjoy peace and prosperity” I am sure it was not to excessive risk-adverseness it was referring.

God make us daring!

@PerKurowski ©

John Dizard has provided us with a very important wakeup call on energy storage batteries

Sir, I think that everyone that wants to fight climate change, but feels that is best done by keeping the climate change profiteers at bay, need to be very grateful for John Dizard’s “Lack of economic rationale is a feature of battery-storage hype” April 4.

I myself am guilty of having preached, to friends and family, the benefits of new energy storage batteries without really checking up on their real costs. I will immediately go silent on this without further checking up.

@PerKurowski ©

Having carbon taxes fund Universal Basic Income schemes would align the fights against inequality and climate change

At least in the 1980s (I do not know of the before and after) high European taxes on gas (petrol) were defended by the need to protect the environment, while at the same time, at least in Germany and Spain, the much dirtier coal was being subsidized. And the resulting tax revenues are of course huge.

Stephen Foley writes about how investors should adapt their exposures to fossil fuels given all declarations of war against climate change. ”Even oil barons are giving up on fossil fuels”, April 4.

But the taxman needs also to adapt. If we consume less gas/petrol tax revenues will go down, so it is not farfetched to think that those hungry for tax revenues to manage, will again exploit the environmental argument to increase taxes… though they must know that puts their tax revenues on a sort of unsustainable path.

I believe though that climate change is best fought on its own merit, which means keeping the climate change profiteers, whether private or governments, at far distance.

In my own country Venezuela, as a tool to get rid of monstrously large gas subsidies, I have been proposing that all the net income the government derives from the domestic sale of gas, should be paid out in equal parts to all citizens, so as to keep the redistribution profiteers at bay.

And if the whole world did the same, using carbon taxes as a fundamental source of income to pay for a Universal Basic Income, that would not only help to increase fiscal transparency, but also beautifully align the fight against inequality with the fight against climate change.

Placing our banks into the hands of a Basel Committee is surely one of the greatest acts of naïve realism ever

Tim Harford quotes George Carlin with “Have you ever noticed when you’re driving, that anybody driving slower than you is an idiot, and anyone going faster than you is a maniac?”, “Delusions of objectivity” April 2

And Harford refers to a new book, The Wisest One in the Room, co-authored by Lee Ross, a psychologist at Stanford University and that describes the problem of “naive realism”… “The seductive sense that we’re seeing the world as it truly is, without bias or error. This is such a powerful illusion that whenever we meet someone whose views conflict with our own, we instinctively believe we’ve met someone who is deluded, rather than realising that perhaps we’re the ones who could learn something”

But let me also quote from Tim Harford’s book “Adapt” of 2011. It states: “So far this book has argued that failure is both necessary and useful. Progress comes from lots of experiments. Many of which fail, and we are to be much more tolerant of failure if we are to learn from it. But the financial crisis showed that a tolerant attitude to failure is a dangerous tactic for the banking system.” In other words Harford holds that, those not allowing for sufficient risk-taking are idiots and those allowing too much risk taking are maniacs”.

And in his book Harford also quotes Charles Perrow, emeritus professor of sociology at Yale explaining that the dangerous combination is a system that is both complex and tightly coupled, and saying that the banking sector “exceeds the complexity of any nuclear plant I ever studied”.

And when commenting on the Piper Alpha (nuclear plant) disaster Harford writes: the “safety system introduced what an engineer would call a ‘new failure-mode’ – was precisely the problem in the financial crisis: not that it had safety systems, but that the safety system it did have made the problems worse”. Harford illustrates that with the example of credit default swaps CDS.

But finally, in “Adapt”, Hartford also argues: “Among the bitter recrimination over the financial crisis of 2008, if there’s a consensus about anything is that the financial system needs to be made safer. Rules must be introduced, one way or another, to prevent banks from collapsing in the future”.

And of course that’s wrong! Because that might precisely represent the worst kind of bank regulation risk!

In May 2003, in some comments delivered as an Executive Director of the World Bank during a workshop for regulators I said: “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.”

Coming back to Harford’s "Delusion of Objectivity" I would hold that one of the greatest acts of naïve realism of our times, is believing that a small group of technocrats, holed up in a mutual admiration club like the Basel Committee effectively is, can regulate our banks to be safer, without creating even larger risk.

Just for a starter they regulated the banks without defining the purpose of banks, which allowed them to introduce their risk weighted capital requirements, which completely distorted the allocation of bank credit to the real economy.

Clearly in reference to my criticism of Basel regulations, most in FT believe, or had been told to believe, that I am someone quite deluded, rather than realising that perhaps they are the ones who could learn something from me.

I confess I am obsessive on this issue. They should confess they are even more obsessive ignoring this issue. 

@PerKurowski ©

Rules that make all banks behave the same can pose greater systemic risks than all SIFIs put together.

Sir, I refer to Brooke Masters article on “systemically important financial institution whose failure could destabilise the economy” “MetLife’s court win means US regulators should redraft rules” Saturday 2.

Before regulating or redrafting anything, regulators should at least come to understand that their own rules might be the source of the most dangerous systemic risks.

In 2001, in an OpEd I wrote the following onbank regulations:

“The regulatory risk: Before there were many countries and many ways of how to regulate banks. Today, with Basel proudly issuing rules that should apply worldwide, the effects of any mistake could be truly explosive. 

Excessive similarity: Encouraging banks to adopt common rules and standards, is to ignore the differences between economies, so some countries end up with inadequate banking systems not tailored to their needs. Certainly, regulations whose main objective appears to be only to preserve bank capital, conflict directly with other banking functions, such as promoting economic growth, and democratize access to capital. 

Low diversity of criteria: A smaller number of participants, less diversity of opinion and, with it, increased risk of misconceptions prevailing. Whoever doubts that, should read the dimensional analysis that ratings agencies publish. 

Backlash: The development of decision-making processes has benefits but also risks. Thus we see that the speed of information itself, which promotes quick and immediate response, can exacerbate problems. Before, those who took the problem home to study it, and those who simply found out late, provided the market a damper, which often might have saved it from hurried and ill-conceived reactions.”

And already in 1999 in another OpEd I had written: “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 its collapse”

And then Basel II’s 20 percent risk weight for AAA rated securities, caused the financial crisis 2007-08; while Basel I’s zero riskweight assigned to sovereigns, doomed sovereigns like Greece.

Of course there is a need to think about the systemic risk of SIFIs, but even more important, is looking to minimize the systemic risks of bank regulations… or at least to recognize their existence.

A million of individual small banks can easily be turned into a very dangerous Systemic Overall Important Banking System, by just some rules drafted by some members of that mutual admiration club known as the Basel Committee for Banking Supervision.

@PerKurowski ©

When securitization wedded the capital requirements for banks, the subprime mortgages' inferno overheated.

Sir, I refer to Gillian Tett’s “Unorthodox answers to the inflation enigma” April 1.

Ms Tett writes: “If the Fed, or any central bank, wants an illustration of why ethnographic research matters, they need only look at the last credit bubble, when most economists missed the subprime mortgage boom because they shunned on-the-ground research. Fed officials need to get into consumers’ lives. Or else hire a few anthropologists to work with those office-bound, and baffled, economists.”

Unfortunately central bankers have yet to understand the missed subprime mortgage boom, and so has anthropologists like Gillian Tett.

Anyone who has read Kirsten Grind’s spectacular tale of the Washington Mutual failure “The Lost Bank” 2012, Gillian Tett has praised it, should have been intrigued by a question the book poses but that remains unanswered. Why was there especially such huge demand for basically the lousiest mortgages?

An objective researcher would then have found that combining the dark secret of securitization, with the importance given to the credit rating agencies for determining the capital requirements for banks, created a temptation impossible for any ordinary humans to resist.

What “dark secret of securitization”? That the worse the assets to be securitized are, the more can those involved in the securitization process profit. Selling of a $300.000, 30 years, 11 percent mortgage, packaged in a security for which an investor thought that 6 percent was a great return, would immediately yield $210.000 in profits.

And on credit ratings, if a security got an AAA to AA rating, then the banks, according to Basel II, needed only to hold 1.6 percent in capital against it, and were therefore allowed to leverage a mind-blowing 62.5 times to 1.

The problem with any central bank research though, is that it would lay much blame on all central bankers involved with bank regulations… and, among colleagues, we can’t have that, can we?

Oh how I wish Kirsten Grind would go back to the subprime inferno and research the causes for why it overheated.

@PerKurowski ©

What if all redistribution is paid by a special tax and shared out equally keeping redistribution profiteers away?

Sir, Marin Wolf discusses the utterly important issue of redistribution of income (and wealth) “The welfare state is a piggy bank for life” April 1.

Citing the Institute for Fiscal Studies Wolf writes: “in the course of adult life, only 7 per cent of individuals receive more in benefits than they pay in taxes”. That sounds as the society is very equal or that the redistribution is very inefficient/costly.

In Finland they are currently analyzing the possibility of a Universal Basic Income. That might not redistribute efficiently over lifetime needs but, by keeping redistribution profiteers away, it might still be a much better alternative than current procedures.

Wolf writes: “benefits paid to individuals, such as housing benefits, tax credits paid to those in work and pensions. In the UK, such benefits amount to a huge sum: 33 per cent of current spending (and 12.5 per cent of gross domestic product) in 2014-15.”

How much money does that represent per citizen? What if it was just paid out directly to all from a specific pro-equality income and wealth tax? If done so that would make it easier to separate re-distribution from the general government functions, and that added transparency could at least help keep some political demagogues at bay.

What causes more inequality, market or government imperfections? In Venezuela, that is a question easy to answer. The poorest Venezuelans have not received even 15 percent of what should be their per capita share of the net oil revenues

@PerKurowski ©