When will a foreign judge be retained in Heathrow?

Sir Martin Wolf questions the current extradition agreements between the UK and the US based on the extremely harsh sentences in terms of time and inhuman conditions that could be imposed on British citizens and for that he paints a horror picture about the US prisons, “Judicial torture and the NatWest 3”, November 30.

I do not know about the prison conditions in the US, thank you Lord, but in too many countries around the world when judges sentence people to prisons, they are in fact sentencing them to another Auschwitz in terms of the absolute disrespect those places show for the most basic human rights, and worse the judges cannot even start to claim they didn’t know. When will the International Criminal Court in The Hague start to investigate these crimes against humanity?

If we cannot correct the correctional institutions around the world the quality of all our future is much in doubt.

Relying on financial pre-screeners could be dangerous to your financial health

Sir Ira Sohn suggests that we should “Insist on pre-approval for novel bank processes” November 30, so as to stop bad financiers from exploiting opportunities in regulatory arbitrage. I wish it was that easy. The fact is that most of our current financial turmoil arose from the use of old time tested instruments called mortgages but that were turned into something very explosive and dangerous when they were bundled up and sent away to the financial markets carrying the approval stamp from the credit rating agencies and who found no reason to look closer at the individual quality of the mortgages. There is no pre-screening in the world that would save us, on the contrary, what we have to do is to reduce the power that our current screeners, the credit rating agencies, which only lends itself to lull the world into a false sense of safety.

Snooties abound

Sir FT’s front page November 30 voices Peer Steinbrück’s, Germany’s finance minister, accusation that bankers are “snooty”. Of course he must be right, almost by definition but, before he throws the first stone, he does well looking closer at those nearer to him. If “snootiness”, a word that I never heard before but immediately felt intimate with, has to apply to anyone I would have to say it is to all the bank regulators who in self congratulatory ways thought they hade tamed the risk in banking for ever with all their Basel inventions.

We need to rewrite bank regulation from scratch before accidents are unmanageable

Sir Martin Wolf asks “how do banks get away with holding so little capital that they make the most debt-laden of private equity deals in other industries look well capitalized?”, “Why banking remains an accident waiting to happen”, November 28.

Mr Wolf could do well reading carefully the minimum bank capital requirements that have been imposed on the banks by their regulators. There he would see that if the banks lend to the public sector, or to creditors qualified as utterly safe by the credit rating agencies, such as securities backed by subprime mortgages, they need very little capital. If, on the contrary they would want to give credit to an unknown and not to well capital endowed entrepreneur, who might help to create those decent jobs the society needs, then the bank has to put up a lot of capital. With this incentive structure guess which route the banks are taking?

Wolf also mentions Henry Kaufmann’s suggestion to submit to special intense scrutiny banks that are deemed “to big to fail”. As the failure of any of this to big to fail banks would clearly have much worse consequences for the world than a little Northern Rock has, I have always suggested that the best way to insure us against the putting all the eggs into the same basket risk, is a small progressive tax on the size of banks. We might lose out on some of the economies of scale, but then again we have always been told that you can’t have the cake and eat it too.

We are in need of swift and far-reaching actions

Sir, Lawrence Summers in "Wake up to the dangers of a deepening crisis" November 25 mentions that there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible…[and] to assure that there is a continuing flow of reasonably priced loans to credit worthy home purchasers." 

This sounds right though let us hope that with it he does not refer to a need for maintaining the prices of the houses. The more intense the market is allowed to work the shorter the adjustment period and that should really be the primary goal. This subprime bad tooth needs to be pulled out very fast if we are to avoid much worse complications.

The other thing we need to do fast is to start to comprehend the real significance of systemic errors in a globalized environment. What brought us here and what could have happened if this subprime mess had had two more years of build-up before exploiting? Let us shiver at the idea and start doing something about it. Please reign in our bank regulators and their commissars the credit rating agencies. Without them, this would not have occurred.

Let us also look at the quality of growth

Sir Martin Wolf in “Who will pick up the thread after the great unwinding” November 21, answers himself that question with a “the rest of the world” and we, praying, join the chorus.

Having said that and since Wolf juggles around with some percentages of growth, and views with some tremor the possibility of a “growth recession” in the US, I would also like to add that, sooner or later, we need also to start looking more in detail at the sustainability and the quality of growth.

I am spending this Thursday of Thanksgiving in New York and I have just been informed that in order for my wife and daughter to access the real bargains during Black Friday I need to go with them to the stores when they open…at 5AM in the morning. Since that cannot be a sign of good growth, if some growth recession could help me from having to go shopping at 4 am next year, well then bring it on.

We the rest also want Galileo

Sir we, the rest of the world, fully agree with Pierre Bartholomé and Kevin Madders´ “Why the Galileo project must go ahead” November 19, for reasons of our own. Just to be on the safe side we prefer two navigational systems so that we can either average out their results or concern ourselves with any differences. Can you imagine having to rely on just one source to tell you where you find yourself? What horrific systemic errors could ensue. In fact why should we not have at least three systems to tell us where to go, especially when seeing how the financial sector, even with their three credit rating agencies sextant, so utterly lost itself?

Who do they think they are?

Having much argued for that the bank regulators should give the banks more time to adapt their capital requirements when there is a systemic downgrading going on of course I would agree with that the monoline insurers should be given some time to improve their capital position so as to avoid a downgrading, as stated in Gillian Tett´s and Saskia Scholtes´ “Bond insurers act to keep their rating” November 19. My question though is about who on earth gave the credit rating agencies these type of power to stay the execution of a downgrading and who is responsible for what happens during the stay? It would really seem that the credit rating agencies are moving up from being mere opinion makers to policy makers.

And what about the composers?

Sir, John Gapper in “A bruising game of musical chairs”, November 15, beats up on some financial sector dancers like Citibank’s Chuck Prince but keeps totally mum about those composers in Basel who wrote the score of the “minimum capital requirements”, picked the conductors and the musicians, the credit rating agencies, who were to perform the music to which the bankers were ordered to dance. As much as I could object the generous severance checks to the dancers much more do I object that our bank regulators are not held accountable and are now almost expected to dig deeper in the hole we find ourselves and which can only lead to even wilder dancing.

We need to look further than the usual suspects

Sir, I absolutely agree with Martin Wolf when in "Big lessons from Northern Rock" November 16, he answers with an unqualified yes the question "Would it no be better to let mismanaged institutions go under, while protecting small depositors effectively?

Nevertheless, that forces us to define mismanagement and though I agree that management should be the first usual suspects we round up, in this case I would loath to let go, without further investigation, all those bank regulators who by inventing the current structure of the minimum capital requirements for the banks, and appointing the credit rating agencies as their commissars, could ultimately prove to be the real intellectual perpetuators of this mess.

And what about the composers?

Sir, John Gapper in “A bruising game of musical chairs”, November 15, beats up on some financial sector dancers like Citibank’s Chuck Prince but keeps totally mum about those composers in Basel who wrote the score of the “minimum capital requirements”, picked the conductors and the musicians, the credit rating agencies, who were to perform the music to which the bankers were ordered to dance. As much as I could object the generous severance checks to the dancers much more do I object that our bank regulators are not held accountable and are now almost expected to dig deeper in the hole we find ourselves and which can only lead to even wilder dancing.

Give the banks some time to adjust

Sir currently when financial assets like the bonds collateralized with subprime mortgages suffer a downgrading by the credit rating agencies, a bank, according to the minimum capital requirements, has to come up with new capital in the case he did not have more capital than needed. When downgradings become epidemic, as currently is the case, this might force such a scramble for bank capital that it could make matters worse.

Again, many downgradings are really not about the assets turning sour but more about discovering that they always were and so really the capital should have been there from the very start, and if so why the rush to now fix it all immediately if the rushing might turn into panic?

In this respect I would suggest that our bank regulators start thinking about giving the banks some time to adjust their capital base, for instance by giving them at least one year to come up with more capital for any asset that is suffering epidemic downgradings.

Why should bank regulators be so lenient? Well for a starter they were the ones who got us into this mess with their minimum capital requirements adjusted to risk invention and with their appointment of the credit rating agencies as their financial commissars.

Please give us a New Oil Deal!

Sir less than ten years ago the price of oil was less than ten dollars per barrel, the Economist wrote in "The next shock?" March 1999, that "in today's condition the price would head down towards $5" and Sheikh Yamani was the toast of the town with his cute ''The Stone Age didn't end for lack of stone, and the oil age will end long before the world runs out of oil.'' Of course all that set us up for low investments in oil exploration and as a consequence the current high prices of oil.

It should therefore be quite clear that when now "Opec seeks assurances on oil demand from consumer nations", FT front page November 12, so that they can invest, it behoves the consumers all over the world to come up with some constructive proposals. The world needs urgently a New Oil Deal and the only ones standing in between consumers and producers to reach it are those who just want that deal for themselves.

We are all in this together

Sir Krishna Guha, in "The world's currency could become America's problem" November 10, describes several scenarios for the decline of the dollar but steers clear from the big question of whether the markets will keep their confidence in our current monetary and financial system if the dollar goes haywire.

After the dollar gave up the last appearances of gold backing in 1971 (Guha might have only been a child then) the world basically accepted a system based on the capacity of their governments, or politicians, to guarantee some sort of financial discipline and which so clearly amounted to an act of faith that it was made explicit by including the "In God we trust" on the currency.

In this respect if the markets come to completely lose their trust in the word of the US governments and their politicians this does not necessarily imply that they will have more trust in the word of other governments or politicians but it could in fact lead them to lose their confidence in all of them, at which point the dollar-yen-yuan-euro value becomes utterly irrelevant, leading to a global scramble for assets to barter, at any price, and perhaps having the prices of the shares on Wall Street quoted in ounces of gold.

And so what do we do now with this piece of knowledge? Unfortunately very little, since while the markets keep having trust in the system there is no major benefit being short of faith. Whether we know it or not we are in fact all in this together.

We might be better off ignoring the credit rating agencies

Sir Gillian Tett in “It’s no wonder agencies are so jumpy over monoline saga” November 9, mentions that Fitch has sort of graciously conceded the “monolines a period of time in which they can raise fresh capital to avoid downgrades”. What financial Frankenstein’s monsters have our regulators created?

Where do they get the powers from to give this sort of instructions while simultaneously telling us that they are only giving opinions and which in terms of the First Amendment means they are not responsible for anything? Perhaps the best we can do is for all regulators to give immediate orders to the market to ignore anything the credit rating agencies say and then take it from there.

Sergeants and generals

Sir when reading Simon Ward’s “How the Bank of England broke its own rules" November 7, I suddenly had a vision of the sergeants drawing up battle plans at headquarters and the generals kept busy running the trenches.

Absolutely, the Basel Accord is the root of our current financial turmoil

Sir I must voice a Hurrah John Plender! for his article titled “The Basel Accord sits at the root of the ongoing crisis” November 7. If we are ever going to have a fighting chance of getting out reasonably well from our current financial turmoil we have to make our regulators more accountable for their mistakes.

Plender refers to how through the minimum capital requirement calculations imposed a regulated arbitrage opportunity was created that forced and stimulated the creation of a parallel financial world that ended up much more difficult to comprehend. To this we would also add the fact that when the regulators then appointed the credit rating agencies as their frontline commissars, then really they set the table for the systemic risks to build up.

Also when Plender asks “whether top executives, let alone non-executives, can really understand the risks being run in such large, complex [financial] institutions”, worrisome as that might be, much worse is having to ask whether our bank regulators really know what they are up to.

What we need is not to cap the oil prices but to give them a decent floor

Sir the real oil crisis occurred in 1998 when the price of barrel fell under $10 per barrel and the Economist wrote in "The next shock?" March 1999, that "in today's condition the price would head down towards $5", and this is what primarily explains the current high prices of oil. Had the consumer countries acknowledged the growth in demand that for instance China would bring to the market (IEA did not say a word about it for years) and expressed their willingness to enter into those reasonable long term contracts that would have allowed producing countries to make the massive investments needed we would most probably have faced a completely different energy outlook.

From this perspective Ricardo Hausmann "Biofuels can match oil production" November 7, and that has 95 countries investing billions of billions in cultivating 700m of acres just in order to cap the price setting capacity of OPEC seems to say the least an astonishing proposition. The question to ask Hausmann is what he will do with those 700m acres when oil having been at last given such a real price floor really starts the pumps. Why don't you give OPEC a price floor without having to go into the environmental and economic nightmare of cultivating 700m of acres that will have to be subsidized in the future and that we pray will not include the Amazon?

What are the costs of not allowing immigration?

Sir you are absolutely correct when in your editorial “Migration debate” November 5 you call out for more “fact-based analysis, not rumour-based angst”. You also say that “Any debate about immigration must begin with asserting the truth that immigration makes most existing residents better off” and though I gladly sign up on that principle, I must remind you that the most missing piece of evidence in the whole debate, is the analysis of the costs of not allowing immigration.

It’s not just abiut the targets but also about how you throw the darts

Sir, Paul de Grauwe opines that “Central banks should prick asset bubbles”, November 2, and though that might be right in terms of monetary policies, whether the central banks throw their darts at inflation targets or assets bubbles, does not excuse them from acting with wisdom when regulating the banks.

When the regulators imposed their minimum capital requirements on the banks based exclusively on risk assessments performed by their commissars or Blackstone type subcontractors, the credit rating agencies, they should have known a reaction would follow. First that many assets deemed more risky by the banks than what the appraisers thought them to be, would probably stay in their balance sheets while all those assets deemed less risky than appraised, would find new balance sheets where to hide out .

Second that the credit rating agencies would turn into the mother of all the systemic risk builders and contagion agents allowing profitable arbitration in risks, mostly through securitization mechanisms. Let us remember that all this subprime mortgages mess would have had no chance of going global, had it not been for the banks being able to sell the mortgages because the credit rating agencies provide these with AAA travelling documents.

Maids for your professionals or professionals for your maids?

Sir Martin Wolf is absolutely right when in “Why immigration is hard to tackle”, November 2, when he says that “this is no area for stealth” and requests more transparency. For instance he makes a good point when mentioning that the “impact on the gross domestic product of migration should be measured after subtracting the incomes earned by the migrants” although perhaps there is also a need to differentiate between temporary and final migrants. Where I am not really sure is when he mentions market-compatible systems like auctions of work permits to be better than arbitrated point systems since neither one of them seems to be covering the problem that could be caused by in relative terms favouring the highest added value workers and therefore implicitly perhaps relegating your own to the lower earning sectors. Do you want to allow a foreigner to work as a maid so as to give your own professionals a better chance or do you want to give the foreign professionals a better chance and have your own work as maids? Not an easy proposition to handle.

Personally what I most favour, everywhere, is massive temporary worker programs so as to allow for the market to cover its short term needs without necessarily forcing the society to enter into long terms commitments. To make these temporary programs more feasible I am currently investigating the use of private insurance companies to guarantee compliance (going back home) instead of putting the burden on already overly stretched migration authorities.

The main obstacle to the development of temporary worker programs lies ironically in the arrogance of developed countries believing that anyone who gets there wants to stay there forever. So instead of making good livable room for all your temporary needs what you are getting is more and more permanent fixtures.

What do we really want from our banks?

Sir over the last two decades we have seen hundreds if not thousands of research papers, seminars, workshops conferences analyzing how to exorcize the risks out of banking; and if in that sense the bank regulation coming out from Basel was doing its job; and centred around words like soundness, stability, solvency, safeness and other synonyms. Not one of them discussed how the commercial banks were performing their other two traditional functions, namely to help to generate that economic growth that leads to the creation of decent jobs and the distribution of the financial resources into the hands of those capable of doing the most with it.

At this moment when we are suddenly faced with the possibilities that all the bank regulator’s risk adverseness might anyhow have come to naught, before digging deeper in the hole where we find ourselves fighting the risks, is it not time to take a step back and discuss again what it is we really want our commercial banks to do for us? I mean, if it is only to act as a safe mattress for our retail deposits then it would seem that could be taken cared of by authorizing them only to lend to the lender of last resort; but which of course would leave us with what to do about the growth and the distribution of opportunities.

Too many monkeys with razorblades!

Sir Stephen D. Young states quite strongly that “Professionals recognise that blindly following any model is foolish” and he is absolutely right but which leaves us with the problem of what to do when so many that are identified as professionals do. I have no problem with finance using sophisticated mathematical models, that’s what these tools are there for, but sometimes I get the impression that our professionals are sent too early to the frontiers without enough basic Boot Camp training. What are you to do if in the trenches your laptop suddenly stops functioning?

In my country, whenever some one goes out in real life believing too much in the tools he takes with him or having too much power for the knowledge he possesses, we usually refer to him as a “monkey with a razorblade”. May I suggest that too many monkeys with razorblades have joined the professionals?

Sir, I am sorry but you’ve got a lousy short term memory

Sir you say it is “Time to avoid a subprime future” October 29, and then discuss the efforts that have to be made to avoid individual fraudulent behaviour of borrowers and lenders since “human nature and markets being what they are” history will repeat itself. Surprisingly though you leave out the fact that all the individual frauds would have gone nowhere, had it not been for the blessing they received by the credit ratings agencies. In another editorial the same day “Memory’s ghost” you rightly speak about the great importance for countries to keep hold of their bad events in its past so as to not resurrect them. Therefore, in the case of the subprime affair I can only conclude you suffer of a truly lousy short-term memory. I am so sorry.

If you really want to avoid a subprime future in mortgages or any other sector it is clear that the first thing you need is to remove the quasi-regulatory role of the rating agencies since the fact remains that the better the credit rating agencies might get at what they are doing, the greater their capacity of leading us down the precipice of ever larger systemic risks.

You can’t sleep on the mattress and put it to work too!

Sir Sir Samuel Brittan in “How to put money in the bank” discusses the very important aspect of banks being able to pay back the deposits when so asked. But a bank is not awarded its franchise only to serve as a mattress but also because it is supposed to help generate job creating growth and distribute the opportunities to those capable of doing the most with the funds deposited.

Missed in the current debate is the fact that bank regulators have over the last two decades imposed through their minimum capital requirements a quite severe regulatory arbitrated bias against what is perceived as risk; and which has altered the flow of funds away from entrepreneurs into consumer financing; and which has clearly affected development as such; and unfortunately now it seems that all of these sacrifices have come to naught, when we are discovering that risks never left town but just went into hiding.

When now the banking regulators might be tempted to dig even further in the hole they find themselves in, let us hope they remember to put a cap on the amount of sacrifices a society can afford to do just in order to get itself a safe financial mattress where to put the retail deposits.

Supernanny as a super decent jobs generator

Sir it is fascinating how different you read things depending on what you are looking for. Being convinced that the capability of generating decent jobs is the glue that holds society together and that the harshest scarcity the world now confronts is the lack of decent jobs, what most attracted my attention in Tim Hartford’s “Supernanny insists that you have the right to opt out” October 26, had nothing to do with libertarian philosophical issues but more with the pragmatic job opportunities that a really proactive Supernanny could help to create.

For instance Harford mentions a smoking permit that would require a doctor’s signature, which essentially signifies a job opportunity. Although I could discuss whether the smoking permit should instead of a doctors signature require an economist to approve it instead to attest to the need of reaching an equilibrium between the individual’s and the society’s utility functions, what most struck me was the job generating capacity a really proactive Supernanny could have, especially if he wants to take advantage of our current technological advances.

For instance using Skype Supernanny should make it obligatory to consult daily with an expert if the chosen tie really matches the shirt. Live on line checking on whether we are brushing our teeth correctly should also be able to generate some very decent and useful teeth brushing supervisors jobs. Now as we of course do not want to impose too much on the personal freedom of choice of people one could also auction out a certain number of permits that would allow to smoke, to wear unmatched ties and to sloppily brush your teeth.

The regulators caused this financial Katrina

Sir, Gillian Tett in “Questions hard to answer” October 17, “A key reason why banks have sliced and diced in recent years is that these rules allow them to hold less capital against loans.” The “allow them” part does not really cut it and the phrase would be more accurate had it said “The bank regulators created regulation that provided the incentives for the banks to slice and dice.” Bank regulators made the rules and the banks acted in accordance, as they should. Can you imagine it any other way? If we are going to get out of this financial Katrina without setting us up to even worse storms we better be very clear about what caused what.

Let us first get rid of the financial commissars

Sir Chris Giles in “Credit squeeze leaves a long shadow” October 17, says that “credit rating are in the spotlight for providing the same rating to complex structured products and simple corporation debt with very different structures assumptions and liquidity”. If this is what we believe the problem to be, just an error in calculations and that new and better technique could take care of, then we have not learned anything and we will just set ourselves up for even a worse financial Katrina than the current. The real fundamental problem starts with the appointment of the credit rating agencies as the financial commissars that the market must heed. We all know that just cannot end well.

The environment needs a freed Gore

Sir in “Drafting Gore” October 15, you are absolutely right about that politics still pull a lot of weight for the Gore camp probably especially so for his closest aids. Many of us cannot wait for Al Gore to make clean break with the politics that tie his hands and so that he will at least be able to utter the word petrol-tax. It is a bit strange to say the least to see a country like Norway, and that even though an oil country applies immense taxes on the domestic consumption of petrol, because of his efforts for a better environment, awards the Nobel prize to a man that does not even mumble about the need of taxing more the consumption of petrol in the USA.

One thing is the appetite and the other what you eat

Sir of course Wolfgang Münchau is right with his “Boring central bankers got us into this mess” October 15 in the sense that they provided those negative real interest rates that fed the appetite for a credit boom and an asset purchasing boom. Having said that he should not be too cavalier about the role of the credit rating agencies who having been so much empowered by the bank regulators, made things so much worse by suggesting to the gourmands some really bad courses, like the so sub-primly awarded mortgages to the subprime creditors.

If Gore is really right then Lomberg is really right

Sir Clive Crook when reviewing Bjorn Lomberg’s recent book “Cool It”, “An inconvenient Danish pasting” October 15, underlines the differences between the Gore camp and the much smaller group of Lomberg followers. This is somewhat unfortunate because the more the truth in Al Gore sermons the more the need for a truly sceptical attitude that considers carefully every opportunity costs, not only to help us to attack the problem wisely but more importantly to keep at distance all those peddlers of green magic potions that could sure tempt us into monumental waste. If on the other hand Gore is not right and climate change induced calamities are not waiting for us around the corner well then a little waste does not matter that much since it would just constitute another drop in that brimming bucket of wasteful spending and throwaway investing

Development rating agencies?

Sir Saskia Scholtes and Chrystia Freeland report that “Moody’s to revise ratings by end of year” and that it is now contemplating something to be marketed as “fundamental value”. Now, if that rating is only to be based on risk considerations then it does not really seem to be of such fundamental value to me. 

Of course a bank should be able to repay his deposits and that is why bank regulators in Basle are using risk to establish the minimum capital requirements. But a bank’s function is not only to be able to return the deposits but also to help promote growth and development and to assist the society in the distribution of opportunities. Otherwise a mattress would suffice. 

In this respect, besides the credit rating agencies, we perhaps should also be thinking of incorporating the criteria of development rating agencies and opportunity distribution rating agencies into the capital requirements of a bank. Only then would we be able to start talking about really fundamental values. 

It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope but it is a real tragedy when developing countries copycats it and falls into the trap of calling it quits.

PD. Are the Basel Committees’ bank regulations good for development?

The one and only focus of Basel is risk-adverseness

Sir John Plender in “Let’s not forget to mention liquidity risk at the Basel round” October 10, though having good intentions gets it wrong, when he says that “the focus of banking supervision has become biased towards capital at the expense of liquidity” as he confuses goals with instruments. The one and only focus of the Basel banking regulations has been to drive out the risks from the banks and for which purpose they decided to use the minimum capital requirements instead of what Plender now seems to suggest some Basel ordered minimum liquidity requirements. The sooner we accept the truth that what Basel has managed to do is to have the risks hide out in the undergrounds, such as Special Purpose Vehicles, or in other dimensions, such as sophisticated instruments impossible to value, the better chance we have of coming to grips with reality. We need also to remember that any nation that decides making risk-adverseness the primary goal of their banking system will place itself voluntarily on the way down. The saddest part is that even developing countries fell in the trap of calling it quits.

Are the bank regulations from the Basel Committee an unqualified success?

Sir Christine Lagarde, France’s minister of economy, finance and employment in her “Securitisation must lose the excesses of youth” October 9 says that “In Europe, regulations initiated by the Basel Committee have served us well” and the question that begs the answer is “who are us?

By their minimum capital requirements methodology what Basel has primarily managed is to introduce a layer of regulatory arbitrated bias against risks and, long term, I do not know of any nation or continent that has been well served per se by more risk adverseness.

Yes it might be true that Basle has been able to reduce in the financial system what Alan Greenspan recently has referred to as the “benign turbulence”, but this could just have the effect of providing more stimulus to the camouflage or the hiding of the risks in other places than the commercial banks’ balance sheets, resulting in less transparency and the possibility of a dangerous accumulation of risks that could end in some real malignant turbulence.

If you need a hole, dig it now!

Sir James Altucher in his high spirited writing about someone else’s “The end of life – but not as we know it”, October 9, in reference to the future of the baby-boomers mentions “the golden years where they begin to cash in the chips they’ve accumulated and figure out how to enjoy the rest of their lives” it seems that is his gently skipping over the question of whether they will in fact be able to cash in the chips. Will there be a market for their big mansions far away from the nearest city or health facility and who will buy their immensely valuable complete collection of the Beatles vinyl records? Will Altucher be a buyer at decent prices?

He point out though some creative hedging strategies for the baby-boomers such as investing in funeral related activities but, given that market conditions at that moment might lead to an severe increase in counterparty risks, perhaps a more solid strategy is to buy the casket and dig a hole at current prices, and then have a Blackwater guard it so that no other less fortunate boomers jump in.

I myself know that I am a baby-boomer but I can’t seem to be able to relate to anyone of them, although I have been told this is a general condition of the current lot of elderly.

It really is about subprime subprime

Sir in order to better understand the current “subprime mortgages” difficulties it is important to remember that there is something such as a very prime mortgage that can be awarded to subprime creditors and that in fact the problem is that the mortgages to the subprime creditors were in fact very subprimely awarded; and many even fraudulent. And this is what the credit ratings agencies should have been able to catch; independently of the statistics of the subprime creditors; independently from the strength or weakness of the housing sector.

Of course once the crisis gets going all subprime creditors are going to pay for it, most especially if they keep on being targeted as the sinners.

Let us beware of upgrading the storm to a hurricane

Sir Gillian Tett reflects well our uncertainties when asking “Is the storm over?” October 4. Now, even if its over, in order to take stock of the damages we will have to wait for quite some time since the costs of any financial crisis are: the actual direct losses existing at the outbreak of the crisis; the losses and costs derived from mismanaging the crisis, for instance injecting too much liquidity and running up inflation; and 3 the long-term losses to the economy resulting from the financial regulatory puritanism that tends to follow in the wake of a crisis and that stops thousands of growth opportunities from being financed. I have hypothesized that each of these individual costs represents approximately a third of the total cost but actually, having experienced a bank crisis at very close range, I am convinced that the first of the three above costs is the smallest.

I mention the above since as we have not yet heard a word from Basle about some flexibility on the minimum capital requirements they imposed on the banks, by perhaps temporarily bringing down the base line from 8% to 7.5%, we should fret about the consequences of the surge in demand for bank capital from having to put assets back on their books and that if not accommodated could upgrade this storm to hurricane.

There is more to be gained from a debate, even while speaking different tongues

Sir Jennifer Hughes does a very good and spirited defence for accountancy global unification in her “More to be gained from talking in the same tongue”, September 27 but although she is absolutely right in all what she says she is still wrong.

One of the reasons, or perhaps the only reasons why some of us feel happy about having US GAAP and IFRS living side by side is because that helps to sustain a debate among their respective Standard Boards on matters fraught with such intrinsic difficulties as accountancy. No, let us please hope that we will never have to face one solid cohesive block of standards since who knows what they could contain and there would be no one with sufficient strength to oppose it. For a living example of how much we lose out in benefits from diversity let us just consider all the risks that are beginning to surface as a consequence of having relegated so much of the world’s regulatory power over banks to a single single-minded group in Basel.

It behoves us all to stand up to the bank regulators

Sir Martin Wolf in “The Fed must weigh inflation against the risk of recession” September 26 mentions “It would be wonderful if those responsible for this most absurd financial crisis could be punished” but for that to happen we need to dare to go to the real bottom of the crisis.

In this respect what most stand out in the Global Financial Stability Report, September 2007, published by the International Monetary Reform is the absolute reluctance by the bank regulators to accept that they, through their regulations, might indeed have been the largest de-facto suppliers of financial systemic risks. The minimum capital requirements imposed by them on banks around the world and their empowerment of the credit rating agencies as the marines in charge of driving out all risks from banking, no matter what, is the true genesis of the problems we now face.

Am I upset? You bet! When reading IMF admonishing the investors with that they “have an obligation and responsibility to understand the dynamics and liquidity risks associated with the products they buy… and they should not assume that the simple letter provided by the rating agencies show equivalent risks as those for hither asset classes” and blithely ignoring that they themselves use those same simple letters interpreted in very simple ways when imposing rules on the banks is frankly shameful.

In November 2004 the Financial Times published a letter of mine titled “Basel is just a mutual admiration club of fire-fighters trying to avoid a bank crisis at any cost”, where I complained that the regulators were so one-track-minded fighting the risks of banking that they blithely ignored all other issues related to the responsibility of banks, such that perhaps some type of financing could be more beneficial to society and therefore merit taking on more risks. Now, they are not only not delivering on the risk elimination front but worse they are even showing a certain willingness of, though in a hole, to dig deeper.

Alan Beattie in “Master of the Universe (Retired)” September 22, when writing about the memoirs of Alan Greenspan “The age of turbulence” references the central bankers with “They would regard themselves as something like the Jedi Council – an ascetic elite who through innate wisdom and arduous training are entrusted with maintaining order”. Be they the wise and the trained the recent experiences still tells us other humble earthlings that if there is any ounce of wisdom within ourselves we now need to stand up to these bank regulators and ask them, or better yet order them to take a better look at their own role in the mess.

Sir, all of us have of course fully supported the independency of the central banks but if they do not have it in them the character to generate sufficient internal criticism and make the debates public then, unfortunately, because of the many dangers from incest, we perhaps need to revisit this whole independency issue.

PS. Paul Volcker’s courageous and honorable 2018 confession: “The assets assigned the lowest risk, for which capital requirements were therefore nonexistent or low, were those that had the most political support: sovereign credits and home mortgages.”

I need to fluoridate

Sir, Michael Skapinker in his “Bottled water and the madness of crowds”, September 25, seems to be searching for the perfect reason why ask the waiter for tap water instead of expensive bottled water. May I suggest “I need to fluoridate”. Unbewits to most of us the use of bottled water has disconnected us from the fluor added to the water in the water taps and so therefore we can already see a whole generation of sophisticated water drinkers ending up with bad teeth. In the US they now almost call it an epidemic.

Regulators, please make the financial flows free to flow again

Sir, when Saskia Scholtes reports that “Moody’s alters its subprime rating model” September 25, we get a glimpse on what is the inherent weakness of any rating system that does its rating from the desk. It is not that the borrowers were subprime that caused the current difficulties since there clearly are many prime mortgages to subprime borrowers, it was that some of those shady operators that always exist in any market exploited the Achilles heel opportunity provided by the credit agencies themselves when they assigned prime ratings to very sub-primely awarded mortgage loans. Anyone should have been able to tell those mortgages were lose-lose propositions if only they have left their desk for just a second to go and have a look.

The above describes perfectly the systemic risks or even the moral hazard that can and will arise from empowering any agent in the market too much and there is no way on earth you can really correct that, and much less so if you insist on doing the ratings by monitoring real life from afar.

I do appreciate the credit ratings efforts and that we should be able to benefit much from their services, but this can only occur if the market is also totally free from not having to use them. Regulators please make the financial flows free again.

Caught between moral hazards and moral duties

Sir, Lawrence Summers rightly ask us to “Beware the moral hazard fundamentalist”, September 24, but ends up sounding a bit fundamentalist himself listing the three conditions that if all met makes “a strong case for public action”, namely that there are contagion risks; that it is a liquidity and not a solvency problem; and that it will not cost the taxpayer any money. Very helpful indeed! Under those conditions the moral hazard of not intervening would seem to loom large.

But what if for example the problems were derived from the fact that the regulator through the use of minimum capital requirement rules had ordered or, somewhat softer, induced the financial institutions to dismantle or, somewhat softer, to scale down their own credit risk departments and follow more the criteria of the credit rating agencies, would the authorities in that case not also have a moral duty to help out?

It is who dwells in the houses that really count

Sir, Wolfgang Münchau tells us that “The big economies are only as safe as houses” September 24 where he more than hints in the direction that a substantial part of the economic growth has come from blowing hot air into houses. Be that so and even though I agree much with his article, as someone coming from a country like Venezuela where we are being setback by more than our fair share of political hot air, I feel a duty to clarify the title by reminding that, at the end of the day, the big economies are only as safe as those who dwell in their houses and the institutions that regulate them.

Then get rid of those paranoid-schizoid bank regulators too

Sir Richard Taffler and David Tuckett say in their “How a state of mind abets market instability” September 21, that when a “paranoid –schizoid state of mind dominates . . . anxiety that might spell caution is denied . . . doubters are dismissed… responsibility disowned. They then say that “the solution to the financial crises will not easily be found in increased regulation, more transparent information or cuts in interest rates. Rather, it lies in understanding how a market in which a paranoid-schizoid state of mind is encouraged is inherently unstable”.

Absolutely, this is where the analysis has to start and so that we can realize as fast as possible that even though it is hard to accept it the sad truth is that our bank regulators are not only themselves in a paranoid schizoid state of mind but they have with all their actions or silences been the worse encouragers of it. Otherwise you tell me, how can you explain that grown up men have harboured such a belief in that they have found a foolproof way to dominate risk and that they could even go to such length as to appoint some agents, the credit rating agencies, to monitor risks for them, as if such thing a thing would be really possible without creating through the feedback enormous systemic risks.

And this is why we now find ourselves in an extremely sensitive situation because more than getting rid of the worst financial agents, which is what you normally do in a bank crisis, here we might first have to get rid of some bank regulators in order not to mess things up even more. I mean I imagine there cannot be anything worse to stimulate a normal paranoid –schizoid state of mind than the presence of a superior paranoid –schizoid state of mind.

On some dangerous impreciseness

Sir Martin Wolf in “The Bank loses a game of chicken” September 21 mentions that “the banks both created the radioactive securitised obligations and set up special investment vehicles (off-balance sheets banks) that they must now rescue at the expense of lending to everybody else” but this contains some impreciseness that is dangerous when we have to act very clearheaded.

First, yes the banks played a role in designing the securitised obligations but what really gave these the radioactive qualities were the prime ratings given to them by the regulator sponsored credit rating agencies. Second, the setting up of special investment vehicles was much a response to the bank regulations coming out from Basel, a response that as the bank regulators let it pass seemed to have been blessed, officially or by ignorance. Third the rescue at the expense of lending would only be true if bank regulators, as they should, since at this moment they serve no real purpose, do not waive some of their minimum capital requirements and thereby do not force the banks to allocate too much capital to harbour the homecoming lost sons.

As a minimum make sure that no one forces you to trust the existence of gold in California

Sir, Philip Stevens ends his “Modern-day parable of the run on Northern Rock” on September 21 questioning “Why should we trust anyone?” though a far more precise question would be why should we should be forced to trust anyone? Describing how “the squall became a hurricane because the risks of subprime lending had been carefully concealed in the mortgage securitisation market and then scattered to the winds” he should have remembered that what allowed that to happen were the prime ratings awarded to these instruments by the credit rating agencies.

Stevens, the doubter, even mentions almost with sadness that “it is too late, even if we wanted to, to roll back the frontiers of financial innovation” but of course that is not needed when all that is called for is some more scepticism with regard to the gold in California.

Start dismantling any forced use of the credit rating agencies, now! If the markets want their services let them say so but do not have the regulators do their marketing for them.

And who pays me?

Sir I deeply appreciated John Gapper’s “Microsoft problem is close to home” September 20 and where he so valiantly gives voice to the for us layman unthinkable possibility that what has been slowing our computers down is not necessarily bad hardware or virus but Señor Windows himself.

Although I confess still being a bit dizzy, if this was to be right, does Gapper think that I could address the European Commission and ask them to share with me some of the money they collected from Microsoft as a partial reimbursement for all my down time?

Alternatively, since Neelie Kroes, the competition commissioner is caught confessing that he “would like Window’s market share to fall from more than 90 percent to nearer 50 percent” and we can safely assume that he assumes this lack of competition lies at the heart of the problem… would it be better for me to sue the Commission instead for not doing their trust-busting job right?

Do we need a product responsibility and liability legislation that is proportional to the market share? At least in those cases were the society itself by awarding intellectual property rights and investing money in their defences creates some of the possible reasons for a high market share?

Some of God's greatest gifts are unanswered prayers

Sir we fully understand the plea of Eric Schmidt in “Global privacy standards are needed” September 19, since for a company like Google it must be nightmarish to manage the 50 different approaches to privacy of each state in the US.

Having said that it is not without some fear that we citizens would entrust a global agency with the development of any global privacy standards, and that is not simply because we could be scared that these regulations could turn out to be too relaxed but also because, just as well, they could turn too rigid for our own good. We are yet in the infancy of a global information revolution where access breeds its own needs and so perhaps, before letting bureaucrats lose, it would be nice see the industry come up and agree with some proposals of their own, just to see how they look.

Eric Schmidt himself clearly points to the benefits of self regulation The problems with regulations is that they normally entail choosing a path from where it is later hard to backtrack and as an example let us just look at how the banking regulators empowered the credit rating agencies and now do not really know what to do with them.

Clearly Eric Schmidt has his own commercial needs for regulations and we citizens have ours, and they might not be the same, but perhaps both of us could benefit from thinking about that phrase from a Garth Brooks song that goes ”Some of God's greatest gifts are unanswered prayers”

PS. We might need a Global Web Constitution

Unfortunately Northern Rock is not the war, it is just a war incident and on top of it only a minor one.

Sir Martin Wolf in “From a bank run to the nationalization of deposits” September 19 takes a Polaroid photo (if anyone in this digital world remembers what they were) and that tells little of the story. Not only because the events that lead up to this Northern Rock moment have been in the pipeline for a very long time but also because, unfortunately, we are still very far away from where we could be able to discern the end of the story and in fact we should all count our blessings if this all stays as the “Northern Rock” moment. Wolf is of course aware of this when he answers his own question on whether this is the end of the story with “a far from it”

The fact then that Wolf raises so early the questions of whether the disaster could have been prevented, whether the crisis could have been better handled and finally on what to do about it in the future can only be explained in terms of a very human desire of wanting to believe its over, looking to numb those fears that Wolf and so many of us share and that make us “tremble at what may happen”.

Wolf sees the events as an “unwinding of past excesses” sort of like shedding some kilos, while I having been much more sceptical of what has been in the doings see the need to unwind much more than that, among other a bank regulatory system that has placed us on the clear course of fewer and fewer bigger banks, until we hit the very biggest final bank bang. For a brief look ahead, read Saskia Scholtes “Credit turmoil set to benefit big banks”, September 19, where you can read on how central banks are already in despair outsourcing their responsibilities to the banks... while naturally crossing themselves.

Bore where are you?

Well here we are the day after the Fed announced the “what do the fed know that we do not know” 50bp rate cut to which the market responded with their own “what does the market know that the Fed does not know” too large jump in the value of stock and it all just reminds us about the truth of the Chinese curse “may you live in interesting times”. Now let us all please hurry back to the big bore.

Does Observer know the difference?

Sir referring a bit unnecessarily sourly to a man who is supposed to have made his peace with society Observer, Spetember 19, comments on some observations made by Michael Milken on real estate loans but that demonstrates that Observer might not really be so clear about what this subprime mortgage business is all about. Perhaps I could help clarify.

We have some borrowers who qualify as less than top of the heap and have been known as “subprime”. Now to these subprime borrowers you can actually extend very prime quality mortgages but and what has really happened is that you can also be extremely sloppy doing that, and of course it is important to be able to tell the difference. My suggestion is although it becomes a bit lengthy we should really have to refer to our current problem sector as those “subprimely” awarded mortgages to subprime borrowers.

Stop them from digging!

Sir, Paul Davies and Gillian Tett in “Moody’s talks of rating reform”, September 18 quote Brian Clarkson, the President and chief operating officer of Moody’s saying “One of the issues we are talking to regulators about is the possibility of creating tools to address liquidity and market issues”. 

And we can just pray for that the regulators understand the real meaning of “when in a hole, stop digging”.

Once again, I do not have anything against the credit rating agencies refining and improving their mostly already very good products. What I oppose though is that the regulators press the market to use these products, since such a bias will only guarantee the introduction of even more severe systemic risks than those that we have been discovering lately with the sub-primely awarded mortgages to subprime borrowers.

If there’s ever been a confession there you have it.

Sir Brian Clarkson, the President and chief operating officer of Moody’s Investors Service in “Transparency and trust must keep on driving rating agencies” September 18, makes a confession that illustrates exactly the risks of securitization, meaning the packaging the selling and the forgetting of an investment by putting it on someone else’s book, and of the real danger of an excessive systemic reliance in the credit rating agencies criteria. He says” There have been allegations of lax underwriting and misrepresentations in subprime mortgage originations. There is no sure way for a rating analyst who is not involved in the loan origination process to detect such shortcomings.” With such a confession do we need more? Of course if a credit rating agency is to award an AAA rating based on the accumulation of a thousand individual mortgage loans, the least one could expect is a closer examination of some of them through a sampling process.

Nonetheless the real value of the confession lies in showing us how fail prone a system is when we are forced to trust someone, as is much the case with the credit rating agencies

There should be limits on how much you can make your opinions heard.

Sir in “Fitch eager to make headlines” September 17, Adam Jones quotes Mr de Lacharriére the owner of Fitch Ratings saying with respect to the possibility of buying Les Echos “that a ratings agency and a financial news provider are complementary since both strive to deliver impeccable information: ‘There is no conflict of interest, we have truly the same objective” May I ask has he ever heard about the reason for separation of powers in any government even though their different branches have the same objectives. On the contrary if I was a bank regulator of those who have empowered the credit rating agency to dictate so much within the financial markets one rule I would make sure of is that these credit rating agencies should have no access to other additional means of imposing what they consider to be their First Amendment protected opinions.

Is the coverage in Business Week influenced by the fact that its parent company, McGraw-Hill, also owns Standard & Poors?

Most probably not but given the real power that has been given to the credit rating agencies that should not even have to be a question we consumers would have to ask ourselves since the regulators should know that it is in their best interest to keep incest as far away as it can?

Is there anything else with sufficient power to stand up to the credit rating agencies going crazy than a free media with the voice to criticize it? Will the criticism be the same if they have the same father? I do not think so and so I would gladly suggest that McGraw-Hill makes up its mind about which part of the business it wants to keep.

Do we then need two world banks?

Sir, Krishna Guha and Eoin Callan, September 13, in reference to a report on the role played by the World Banks internal anti-corruption unit, the Department of Institutional Integrity (INT) were told by Paul Volcker, the main responsible for the report, that “his inquiry had ‘reconfirmed’ there was ‘ambivalence’ in the bank as to whether they really want an effective anti-corruption program or not”. Wrong! Having been an Executive Director at the bank (2002-2004) I sincerely believe that an overwhelming majority of the bank staff clearly comes out in favour of more and better anti-corruption efforts but that these do not come into fruition only because part of the management, rightly or not, believe that these could hinder the bank from operating efficiently… at least as they wish for it to operate for whatever reason efficiently.

If we discuss “ambivalence” then perhaps we should also discuss what the report does not touch upon and which frankly I consider being the single most outstandingly ugly blemish on the World Bank’s reputation. Sir, please search out INT on the external website of the World Bank and click on the list of Debarred Firms and Individuals. There you will find, duly named and shamed, a list of names of individuals that one way or another after a due process have been considered to be involved in corruption, but that list does not include the name of one single of those officers of the World Bank that presumably must also have been involved in corruption one way or another. Susanne Folsom the Director of INT, on a Q&A session on that same site mentions, “We’re often asked why we don’t publicly name Bank staff who are terminated for fraud and corruption as well. The Bank’s rules don’t allow such disclosures….” What credibility can you get naming others while not being willing to name your own?

Sir, it might very well be that the “ambivalence” on anti-corruption in the World Bank is insurmountable but if so perhaps what we need is to have two world banks since the world definitely needs one that comes out completely and unabridged against corruption. And mind you I am far from being a zealot on this issue, since life has taught me well that zealousness frequently carries within its own even more dangerous breed of corruption.

Forest destruction is it a threat or is it a reality?

Sir John Aglionby and Fiona Harvey when reporting on September 13 that “Forest nations press for carbon credits to help cut greenhouse gas” mention “that many governments fear rainforest nations could use the threat of destruction of their forest as a bargaining chip in climate change negotiations”. What threat of destruction? They are destroying them now.

I recently told a prominent-save-the-Amazon person that they should, at 7 am each and every morning, put a matchstick to one hectare of pristine Amazon jungle and transmit this on the web and then perhaps the world could easier understand that it needs urgently to create some huge world forest reserves. These reserves could be managed and cared for by hundreds of thousand forest-guard families and who could all be helped to partially improve their lives receiving a small monthly salary from the whole world, financed perhaps through the levy of a special forestry tax of one cent per litre of petrol.

In 2004 while an Executive Director at the World Bank we were asked at the Board to approve a loan to Brazil for “Environmental Sustainability” and I told my colleagues that what we really should be approving was how much each one of all the world countries would have to chip in to help repay that loan, since obviously keeping our most important lung clean could not only be Brazil’s responsibility.

Does burning 365 hectares per year sound awful? Well the same report indicates that only in Indonesia 1.87m of hectares have been lost every year since 2000. Now having said that… please be careful with the matches though.

It’s a Baron Münchhausen moment for the US

Sir Martin Wolf in “The policy challenge of rescuing the world economy”, September 12 writes that “Prof Martin Feldstein of Harvard University pointed to a 3.4 per cent year-on-decline in US house prices” and “Prof Robert Shiller of Yale argued that the US house prices might ultimately fall by as much as 50 per cent”. Although oversimplified a division would yield that the recession carries a 15 years potential and since this is clearly unacceptable by all standards, one of the main real challenges is how to get out of the current conditions as fast as possible. Wolf mentions the need for the Chinese authorities to expand their domestic demand so that the burden of external adjustment does not fall unfairly on Europe and though he is right on his European concerns I am not that sure that Chinese domestic demand expansion would really be so helpful at this particular time for the US since China’s demand elasticity towards commodities and mid-range industrial products could be higher than the elasticity to the products offered by the US.

This looks in fact much more like what I would call a Münchhausen moment for the US, and by which I refer to that Baron’s legendary escaping from a swamp by pulling himself up by his own hair. If there was ever a moment to hurriedly correct other weaknesses in the US economy; like for instance by tort reform, health sector reforms, more strict supervisions on how much intellectual property right’s originated monopolies are exploited and the introduction of a tax on petrol consumption and that would help to take away pressures from fiscal and trade deficits while at the same time sending a better long term signal to the US economy, this is it.

Do credit ratings stop capitals from going where they should?

Sir Arturo Cifuentes in “Credit of the big rating agencies under fire”, September 12, explains very well some of the problems that arise from that many market participants do not know what the credit ratings really mean. Also and although Cifuentes does not fully enter into that very delicate terrain of explicitly wondering whether the bank regulators who enforce the use of these ratings know what these mean, he at least dares to ask the question of “Under the current regime, is it safe to determine capital requirements? , and for this he should be commended.

Now, having been very critical of how we have substituted the no matter how technically correct still limited vision of a few credit rating agencies for the real biodiversity of criteria of a free market, the most important question we need to ask about the credit ratings is not so much in reference to the calculation of the capital requirements of the banks, but on how these credit ratings can influence the directions of the capital flows in the world. It is of course bad if banks do not have enough capital but let us remember that it is far worse if capitals do not go where they can best deliver results.

It is time to de-regulate the markets

Sir, Wolfgang Münchau in “Stability for the markets is just the start”, September 10 mentions that he is not so convinced of the need to regulate the credit rating agencies since “the smart investors have always known to treat AAA ratings with a pinch of salt”.

Whether the smart investor knows it or not, which also begs the question whether we have a way to divide the financial market into smart and dumb, has nothing to do with the problem. Münchau would do well to read the role of the credit rating agencies in for example the Minimum Capital Requirements by the Basel Committee on Banking Supervision to get a fuller understanding of how much power these First Amendment protected opinion makers really have. Also, although the midst of a crisis might not be the best moment to speak about it, let us not also forget all those who are in real terms hurt by not being more favourably rated. Therefore although I agree completely with Münchau in that we do not need to regulate the credit rating agencies, we absolutely need to de-regulate the financial markets from having to use them.

In Spain there is a saying that goes “We were many and then granny gave birth” and in this respect I feel there are far sufficient forces in the world to drive the financial flows up the mountains towards the same cliffs, so as for they to be further herded on by the credit-rating-boys.

On moral hazards

Sir, one prime problem with subprime mortgages is that it is given subprime terms and so, if a lender would agree to write off a 20% of the value of all subprime mortgages and give the current debtor prime terms, it would not be something outrageous to have the government chip in offering some partial payment guarantee on the balance owed, callable only if the loan is delinquent after a cool-it-of period of perhaps two years, and thereby allow the prime terms to be warranted.

That this could imply the moral hazard of allowing some guilty and bad intentioned borrowers to benefit? Absolutely, exactly in the same way that moral hazard exists when bailing out investors. The final question, as always, is just what side of the equation you most need (or want) to benefit, the debtor or the investor.

To do nothing then?... and have the housing market crash, which could of course help some youngster to at last afford buying a house, but make it harder for other youngster to find a job. You see? It is not easy, even for politicians, as life is only about a continuous choice among so many different moral hazards.

A Frankenstein blaming the monster!

Sir, FT´s Tobias Buck reports, September6, that Charlie McCreevy, the EU internal market commissioner attacked the credit rating agencies for their role in the subprime mortgage crisis. Yes clearly they did not do their homework but the last ones who have the right to voice criticism against them must be the regulators who empowered these agencies to decide so much.

McCreevy mentions that “credit rating agencies provide ratings that are widely relied upon by investors” but he should do well reading The First Pillar – Minimum Capital Requirements by the Basel Committee on Banking Supervision in order to understand that the investor´s reliance is far from voluntary.

Do not forget the mother of all paternalism!

Sir Martin Wolf in “Questions and answers on a sadly predictable debt crisis”, September 5, though he would seem to be qualifying as “paternalistic . . . the abolition . . . of devices that encourage ordinary people to borrow more than they could afford” he does not even get around to mention that mother of all regulatory paternalisms present when investors are forced, stimulated or induced to follow what the credit rating agencies say. A predictable crisis? Yes, just follow the lead of the credit agencies’ exaggerated ratings. A traditional crisis? No way, this is the first ever regulator induced crisis I have seen. Wolf acknowledges “contagion” as a cause; the question that remains though is why he does not want to name the virus bearer, namely the credit rating agencies that with their prime ratings catapulted worse than subprime local mortgages into a global crisis.

But a share is still (mostly) a share… it’s attractive

Sir, John Plender in “There can be no return to ´normality´ of a freakish bubble” August 30, mentions that “in the midst of all this, many investors are baffled that equity markets have not been seriously damaged”. The explanation for this should be quite clear though, in this freakish market, at least for the time being, a share is still mostly a share, and you can see its value quoted daily, so when you compare it to all those fancy investments where your advisors is currently asking for more time to figure out what it could be worth, give and take 20%, no wonder a share looks attractive.

But we still need to be rescued from the central bank's regulating follies

Sir though I agree completely with Martin Wolf in that "Central banks should not rescue fools from their folly", August 29, we should not forget that at least we need someone to rescue us from central bank's regulating follies. It was because the regulators appointed, certified and in some ways even forced the market to heed the opinions of some special inspectors, the credit rating agencies, which allowed for instance some worse-than-subprime very local mortgages to be classified as non-lemons, enabling them to go global and spread their rot.

Barack Obama is looking in the wrong direction

Sir, Barack Obama in “Fine unscrupulous mortgage lenders” August 29, believes that “the implosion of the subprime lending industry . . . all started with a good idea – helping people buy homes who previously could not affor to”. He is seriously mistaken.

What catapulted some lousy awarded mortgages (forget about calling them subprime, they are much worse than that) into a global financial problem was that some credit rating agencies have been too much empowered by the banking regulators to do their oversight.

If we do not fix that, then next time around our problem might not be with mortgages but with something even much worse.

But the regulators should have known!

Sir, Charles Calomiris and Joseph Mason are exactly right when in “We need a better way to judge risks” August 24, they say that there is no “use blaming the rating agencies, which are simply responding to incentives inherent in the regulatory use of ratings” and recommend that we just have to avoid “settings standards for permissible investments by regulated institutions”.

Now it is most important that we understand that the real reason for abandoning the regulatory enforcement of the use of the credit rating agencies is not because the credit rating agencies have been bad at what they have been doing, the subprime mortgages is a big exception of course, but the simple fact that the better they get; and therefore the more we would tend to automatically follow their opinions and the harder it would be to express contrarian views, the higher the risks that the world will encounter some systemic risks of truly catastrophic proportions. And that the regulators should have known.

And why does not the US use the World Bank for their infrastructure needs.

Sir, Felix Rohatyn and Warren Rudman in their “Federal action is needed to rebuild America” August 23, come out in support of a proposal for a new bank to address “the critical needs of infrastructure”. This. at least in Rohatyn’s case, being from the private sector sounds a bit surprising. But, if they are right, why would the US need a new bank for that? … when there is International Bank for Reconstruction and Development, IBRD, better known as the World Bank.

Not only would the US by using the World Bank set a great example and help to scale that institution for some really big globalized action that might be needed but also, at least for a start, the World Bank would probably be quite covenant lite… sorry I mean conditionality lenient with the US.

Misleading advertisement

Sir, on FT’s front cover you announce Clive Crook’s “The next financial crisis starts here” August 23 with the phrase “Punishing the real culprits”, It turns out to be misleading because even though Crook mentions “stamped AAA by the credit-rating agencies” which of course was what catapulted some local bad lending policies into a global financial problem, nowhere does he mention those who empowered the credit-rating agencies to has such an influence, namely the bank regulators.

But what are the non-professionals to do?

Sir Krishna Guha in “IMF warns of risks to global growth” August 22 reports that John Lipsky, the number two official at the International Monetary Fund, seemingly quite unseemly washing his hands in relation to the issue whether the credit rating agencies have done their job well said “The basic issue is that in the end, professional investors bear ultimate responsibility for risk assessment and management in a securitised market. It is not realistic to expect third parties to take that responsibility.”

There is of course nothing to object to that statement, c´est la vie, but it clearly leaves a question or two about what to do with all those who are not professional investors or that just thought they were and who followed the advice of the credit rating agencies just as the bank regulatory authorities, and the IMF, told them to do. Is the IMF now arguing for two lender of last resort now? One booth for the professionals and one for the credit rating agency followers?

It is not about to little or too much but about the right or the wrong regulation

Sir, Barney Frank, the chairman of the House Financial Services Committee says in “A (sub)prime argument for more regulation” August 20, that “the subprime crisis demonstrates the serious negative economic and social consequences that result from too little regulation”. He is wrong. The question should not be about too little or too much regulation but about the right or the wrong regulation. At this moment there should be no doubt that what leveraged the very local subprime mortgages problem into what seems to be a global crisis, was having empowered the credit rating agencies to explicitly or implicitly impose so much of their criteria on the markets, and that was ordered by the regulators.

I am not against credit rating agencies. Of course I will use them. But please unshackle the markets from having to use them.

On calling the credit rating agencies poker hands.

Sir, Roger Blitz in a “Harvard professor flushes out answers to life’s hard calls: poker” August 18 reports that Charles Neeson, a Harvard law school professor will set up some “global poker strategic thinking societies” around the universities arguing that “poker teaches people to think for themselves.” What an extraordinary sense of good timing, I mean now when the credit rating agencies have been called out on some of their strongest AAA bluffs and investors have to start to think for themselves again.

Unshackle us from the credit rating agencies…please.

Sir, Gillian Tett in “Fears of crash unfounded – for now” August 18 describes very well the origins to the current market turmoil tracing it back to the American housing markets. Unfortunately she leaves out what is the most important fact we need to be aware of and consider, that is if we want to keep that “for now” where it is.

It was primarily an excessive confidence in the risk assessment done by the rating agencies that managed to catapult what should have remained a small local problem of badly awarded mortgages, into a global mass-confusion. And that excessive confidence sprang foremost out of the fact that our regulators, going against what all human wisdom should have taught them empowered the credit rating agencies to implicitly and explicitly to decide so much about where market should go.

The real truth we need to realize to face is that the better the credit rating agencies could get at what they are supposed to do truth is that the larger could be the build up of really dangerous systemic risks and therefore the bigger the ensuing explosion.

I am not against credit rating agencies. I will always use them. But please unshackle the markets from having to use them. Otherwise I guarantee you all that what will happen is that sooner or later 100% all our pension funds might end up in AAA illiquid junk.

Chávez is in fact out of control.

Sir, in your editorial “Chávez in control“ you seem to believe that the president who loves to be called “Commander” has with this recent proposals of some changes in the Venezuelan constitution and that among other would allow him to reign forever, has suddenly reached a point of inflexion where now his plans “would be to weaken democracy”. You also mention “a landslide victory” for Chávez in the elections in December last year.

Sir, you have been mightily misinformed. Last December the opposition managed to get 4.3 million votes, 37% of the electorate and this was counted by the electoral authorities who had all been appointed by Chávez and who did not include among them anyone who represented the opposition. And that 37% of the electorate, ever since December 2005, because of their more than reasonable distrust in the electoral system, have had to live with a Congress with 167 members in favour and very obedient to Hugo Chávez and none, zero, zilch of who differ with him.

Please, whatever, do not tell us it is only now this authoritarian is getting in control since truth is, if anything, what is happening is that he is now really getting out of control.

The regulator’s human folly

Sir, Sir Samuel Brittan clearly knows his way around the humans when in “The crooked path of capitalism”, August 17, he says “experts are never as likely to be wrong as when they speak with near unanimity”. I suppose he would agree then that it is has been a human folly of monumental proportions that regulators have forced the financial markets in so many ways or forms to have to heed the criteria of the credit rating agencies.

Credit rating agencies should be free to rate, but the markets should also be free of not having to follow them

Sir, you can give “Subprime ratings for rating agencies” August 17, and blame them for all but the original sin lies in having empowered them by ordering much of the markets to act in accordance to their ratings. The better the credit rating agencies gets at what they are doing and the more trustworthy they become, the worse the next explosion of a systemic risk… that is what risk is truly all about.. Tell that to the regulators.

Do not blame the messenger!

Sir, Avinash Persaud in “Hold tight: a bumpy credit ride is only just beginning” August 16, speaks nostalgically about those days “before securitization” and indeed he is right in so many ways especially on that part of the banks not any longer carrying and nurturing the credits on their own books. But he should not blame it on securitization as such, that is just a very valuable tool, if used correctly. He should blame instead those bank regulators that arrogantly thought they could drive banking risks out of banking without any consequences and that empowered a couple of credit rating agencies to do the impossible task of correctly rating credits without introducing systemic risks.

Credit rating agencies should be free to rate but the markets should also be free from not having to follow them.

Sir, every comment in Richard Beales and Saskia Scholtes´ extensive and detailed “Critical focus turns on rating agencies”, August 16, seems to underline the idea that credit rating agencies can do a better job, while the most important fact we need to realize is that to correctly rate credits is such an impossible thing to do that we should never adjudicate special powers to any agency to influence the market. The first thing we need to do is to start dismantling the system of using credit rating agencies. Of course they are free to rate, but the markets should also be free not to follow them.

Just do no harm

Sir, Jaques Diouf “Biofuels should benefit the poor, not the rich” August 15, prescribes such a complexity that our first and only reaction is… forget it! Much more reasonable seems to try to live up instead to that single three word rule that says “do no harm”,

We need to repair what fear brought us last time

Sir, Martin Wolf writes that “In a world of overconfidence fear makes a welcome return” August 15, as a response to the current unknown-knowns of the market as Rumsfeld would have phrased it. Although I cannot say that I disagree with his article it brought back to my memory the first piece I ever published, titled “Puritanism in Banking” Caracas, El Universal, back in 1997, where I warned against the costs of overreacting to a bank crisis. At that time I felt that the premature adoption of some of the banking regulations pushed by the authorities in Basel had made a recent bank crisis so much worse.

The role of the credit rating agencies and that came as response to previous crisis has caused much of the market to relax its due diligence processes and is therefore something directly responsible for the runaway financing of not just subprime but absolutely wrongly awarded mortgages. Now it is obvious that we need to dismantle a system that places so much decision power in the hands of some few credit rating agencies and which undoubtedly is setting us up to systemic risk Tsunamis.

Also, instead of injecting so much liquidity why do not the Central Banks try to loosen up those capital requirements that Basel created in reaction to previous banking frights. This would of course not fuel a renewal of a subprime mortgage boom or anything like it, but allow for the recognition of the disaster to be more digestible. Summing up, ironically, what we now need is also to repair what fear brought us last time.

Please unshackle the markets

Sir, in a “Shake-out could help the markets” August 14 you make it clear that Central Banks should offer liquidity but not rate cuts and I fully agree, as you, based on the evidence we have seen. Central Banks are there to be there when needed but always with ever more demanding conditions and rates.

What they could also do is to suspend, until further notice, hopefully forever, that so much of the market in its investment allocations, has to heed the criteria of the credit rating agencies. Now is the time to unshackle the market and allow it to better find its own way out of the mess.

I wonder if also the Central Banks should not give a second look at those minimum capital requirements that the Basel banking regulating community has imposed on the commercial banks. I mean from yesterday to today it is not like the banks have become more risky, it is more that they are discovering how risky they really were, and so the Central Banks should perhaps help to ease that tragic moment of realization.

Where the buck really needs to reach

Sir, David Hale in “The Credit crunch and the quandary of the Fed” August 14, is just another one in the long line of commenter on the current financial turmoil that refuse to apportion responsibilities where they should go. For instance when he says that “the rating agencies facilitated the boom by giving high credit scores to securities with loans of dubious quality” the facilitated is by all means an understatement since they in fact have a great responsibility for that boom. Mind you, not that the “buck” should stop with the credit rating agencies. In the first line of responsibility, without any doubt, are those regulators that instructed and even in some cases ordered the market participants to stop thinking for themselves and heed the expert opinion of the credit rating agencies.

If we don’t realize all this and furiously back-peddle from our current setup, if we survive this turmoil, we will not do so the next time around. There is just too much systemic risk fabrication going around.

This time though ignorance was mostly fabricated

Sir John Kay in “The same old folly starts a new spiral of risk” August 14 recounts a story from the files of Lloyd’s to make a case for how “people who knows a little of what they are doing pass risks to people who knows less” and so therefore risks tend not to spread but to concentrate setting us up for an explosion. I agree that we might or should have already learned our lessons from that but in the current turmoil there are in fact two new elements that give a fresh perspective on financial history. The first, the most ironic, seems to be that it was in fact those most knowledgeable participants that with their excessive arrogance fabricated with their sophisticated financial models their own ignorance and second, more tragic, that the market was not allowed to apply its own and perhaps even more wise ignorance, but was instructed, by the regulators, to follow the advice of the experts, the credit rating agencies. The concentration of risks under such circumstances could prove to be even much more explosive.

On eating green

Sir Fiona Harvey informs on August 13 that now there is “A chance for shoppers to start counting carbons” beside the carbs, and that a packet of Walkers potato crisps contains 75g of carbon dioxide a mango and passion fruit smoothie 294g.

Great, this is more information for an information starving world. But how do we best digest it? For a start and even when I run a blog on the environment, http://www.ourpiedaterre.blogspot.com/, I have not a faintest clue of what 75g of carbon dioxide means. ¿Could you give it to me in equivalent to litres of petrol? Eating those chips means driving how many miles? I could perhaps connect more easily to that sort of information; I mean having been told that to get rid of those potato chips I have to walk so many miles.

Don’t get me wrong, I am all for maximum disclosure, but if it is to be helpful and not produce more g of carbon dioxide in the gathering and printing of this information than what it saves in the consumption of those same g then we need to increase its transparency. Next time what I would like to see is how many g of carbon dioxide Walkers potato crisp contains by g of carb, calories and fat, saturated and non saturated of course. With this information I might then be able to be so much more effectively green in my dietary and culinary endeavours. By the way, could this be a way for children to make up for not eating their greens?

In the stupid/intelligent, coward/valiant chart where will history plot today’s investors?

Sir it is clear what Saskia Scholtes is driving at in “Fear rather that fundamentals is driving trading” August 11, but as she readily admits that it can become self-fulfilling, we should never forget that fear can easily morph into a fundamental. You can fear finding a bear in the woods but if it appears you’d better treat it as a real fundamental or you pay for it. Now how you handle that fundamental and avoid panicking well that is a totally different matter which brings us to a graph where on the axis we plot from stupid to intelligent and on the y axis from coward to valiant, and then sit back and wait for history to plot us…on a minute by minute basis.

Even in a nightmare you might find good things to do…while awakening

Sir I just read David Gardner’s hair-raising “Lost in Iraq: the illusion of an American strategy” August 10, and, if he is right, then what he is telling us is that Iraq does not any longer exist and that even if there was never a reason for the USA to enter Iraq now there seems to be plenty of reason for why the world cannot leave Iraq. In a globalized world where does it say that the remains of a failed nation should go to the neighbours?

Also reading about the nightmare I once again felt that the best thing the USA could do, while trying to get out, is to impose, by brute force if needed, a transparent revenue sharing system that spreads out the oil income directly to each of the Iraqi citizens. Around the concept of a monthly check, of probably more that 100 dollars per citizen, you could find the real incentive needed for some good nation building. The current oil revenue sharing being discussed has nothing to do with the people but seem more like agreements between all the power grabbers about how to share the oil loot.

Markets also abhors experts not behaving like experts

Sir, Frank Partnoy in “Markets abhor the vacuum left by derivatives” August 10 describes very well why the volatility has increased as a result of the investors finding out that their investments are in many cases not accurately or timely valued and that they might be up for some nasty surprises. Add to this the fact of having to see how good grades were awarded to mortgage collateralized debt obligations by the credit rating agencies without them even leaving their desk and do a little check-up on how those mortgages were issued and you might see the perfect volatility storm coming into sight.

We need to attach a warning message to the credit ratings.

Sir Andrew Ward reports August 10 that President George W. Bush has said there was a “proper role for government” in enhancing financial literacy as “we had a lot of really hardworking Americans sign up for loans and the truth of the matter is they probably didn’t fully understand what they were signing up for”.

Mr Bush might have a point but from what we currently see those most in need of a financial literacy course seem to be all the investors struggling to make head and tails out of credit rating grades or financial models that really do not mean what they say.

Of course it also cannot only be a question about the reading but also about the writing. For a starter, as a minimum role for the government, I would suggest they start by making obligatory, whenever credit ratings are disclosed the inclusion of a “Warning, following these ratings blindly is dangerous to the financial well being of your portfolio.”

Does procreation include the possibility of adoption?

Sir Clive Crook with “Let the rich go forth and multiply” has really fired up my interest in reading Gregory Clark’s upcoming “A farewell to Alms: A brief Economic History of the World”, August 10. Besides of course forcing me to look up the meaning of “alms” it also left me with the question of whether this generous procreation of the rich so that it spills over into the less fortunate development method does also extend to Angelina Jolie’s adoptions of poor children.

Liberty and security also requires consensus

Sir, although Willem Buiter might be fundamentally correct when he says “For the sake of liberty and security: legalise all drugs” August 8, he should also remember that for the sake of that same liberty and security he needs to frame his idea in such a way that it is acceptable for the majority. 

In this respect and making reference to Moisés Naim’s interesting book “Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy”, (2005) and that reminded us of how much of the illegal world was interconnected, perhaps a more consensus reaching approach could be to identify the whole world market of illicit and legalize it at a rate of 5 per cent a year starting with the more digestible. 

Otherwise they way the world is going its illicit part is soon going to be wealthier and stronger than the licit… and that is more dangerous than hundred al-Qaeda put together. Also while discussing these issues let us never forget that strict social sanctioning is normally a far more efficient route to go than the strictest of the law enforcements.