Inside or outside the Euro-fence

Sir I refer to your “Ring-fencing the vulnerable in a crisis” October 31. I had always held that the biggest problem with walls, borders or ring-fences is that, except perhaps for the very short term, you can never really be sure you have ended up on the right side.

A country finding itself inside the Euro-fence receives indeed some protection, at least temporary, but it also means that its responsibilities to fight it out are the greater… and it can still run out of freshwater.

What would have happened with Iceland had they been living inside the Euro-fence? What would be the price extracted from Iceland to allow it now some Euro protection? Would the younger generations of Iceland accept paying that price because of their parents’ follies? Should the parents of Iceland ask their kids to sign up as guarantors and help to repay for their parents’ follies? Might some Euro countries actually be envious of the non-Euro Europeans who though perhaps suffering more might also get over it faster?

Out there, in the real world, nothing is perfectly clear.

The regulators took us back to the dark ages!

Sir, though I agree with most of John Kay’s “Could Napoleon have coped in a credit crunch?” October 29, I protest when he says that “The financial innovation that was once the means of spreading risks is now an unmanageable source of instability.” The source of instability was not the financial innovations per se; the prime source of instability was that those financial innovations were rated triple-A and that we so much believed in the ratings.

In Against the Gods Peter L. Bernstein (John Wiley & Sons, 1996) wrote that the boundary between the modern times and the past is the mastery of risk, since for those who believe that everything was in God’s hands, risk management, probability, and statistics, must have seemed quite irrelevant. Now and as far as I am concerned, when the bank regulators put so much faith into the credit rating agencies, they inadvertently took us back to the past.

Après us le déluge?

Preventing a global slump is indeed a priority as Martin Wolf says October 29, but relying solely on government to do so could mean breaking the back of their finances, further inflaming “xenophobia, nationalism and revolution.”

We need to help governments to be able to help in ways that keep their credibility and therefore, instead of talking about tax cuts, knowing that so many new and urgent real life spending needs will knock on their doors soon, more than recommend tax cuts, as if those had no costs or as in let-our-grandchildren pay, we need to start thinking about new taxes that could be perceived as legitimate and interfering little with the economy.

I am floating around two new tax proposals. A special tax on all profits derived from intellectual property rights that will help to pay for the costs of enforcing those rights and a progressive corporate tax based on market share and that, among other, could help to keep in check the too big to fail risks.

Another possibility is that governments use very long term zero-coupon bonds when providing assistance buying up portfolios or mortgages, remember the Brady bonds?. That could at least buy them the time needed for economies to reflate back to where this new public debts can be duly serviced. Yes, “deflation is lethal for indebted economies” but so is public debt when it surpasses the level of what is perceived as manageable.

A case for massive immigration?

Sir in “Learning to live with excess debt” you hold that though “deleveraging is needed but authorities are right to slow it” and you also warn against “overstretching” solvent states as “currency meltdowns could follow” and you therefore conclude that “the only viable alternative is to accept current debt levels and try to grow the economy to match them” October 29.

In practical terms what does it mean? That the US should accept the help of many million more immigrants, preferably legal, so that they can help to grow the economy and pay its fiscal costs?

But first make real sure reserves are worth something, when needed.

Sir George Soros, October 29, writes that “America must lead a rescue of emerging economies” and of course he is right. Who else could? Who else would?

Having said though when Soros then writes about the possible assistance the IMF might give a country like Brazil in terms of “$15bn, a pittance when compared with Brazil’s own foreign currency reserves of more that $200bn” he reminds us that the rescue efforts also includes making sure those $200bn are to be worth the same $200bn when Brazil might need to use them, and that by itself will require immense efforts, primarily, by the American taxpayer.

In God… and in the American taxpayer we trust!

When in a panic, think, for a millisecond at least!

Jeffrey Sachs tells us: 1.- Extend swap lines to all main emerging markets. 2.- Have IMF extend low-conditionality loans to all countries that request it. 3.- Discourage big banks from withdrawing credit lines from overseas operations. 4.- China, Japan, and North Korea should undertake a coordinated macroeconomic expansion. 5.- Middle East needs to recycle all their cash. 6.- US and Europe should expand exports credits for low and middle income countries. 7.- US and Europe should follow an expansionary fiscal policy. According to Sachs "At the least it would put a floor on the global contraction that is rapidly gaining strenght. "The best recipe for avoiding a global recession", October 28.

Even if we would accept Sachs very optimistic view on the fiscal outlook as true, we should ask whether this is wasting aspirins or throwing real medicine at the problems? Compare Mr Sachs´ advice with what Michael Skapinker, on the same page tells us that Wal-Mart is doing to enforce ´sustainability, demanding "rigorous environmental and social standards", "An ethics lesson from an unlikely quarter".

The big question becomes then, should we now pull out all the stops in order to regain equilibrium on what might be a path to unsustainability or should we use this crucially decisive moment to provide the incentives to explore other perhaps more sustainable routes? In the panic it is still wise to take a brief time-out and think about what door to use. In fact our world at large is not only looking for an escape door for a financial crisis, it is looking for a door that can lead it to a better place. But, of course, neither do we have all the time to make up our mind… it is burning out there.

Do we dare to answer?

Sir Thrainn Eggertsson in his “Long-term consequences may be ruinous for Iceland” October 28, is really asking us… “Is Iceland not better off following the Argentina route? If our sons and daughters were from Iceland, do we dare to answer that question?

Instead of avoiding risks we must embrace the right risks

Sir, Lawrence Summers writes "The pendulum swings towards regulation" October 27. He is right but, when reminding us of the "need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact", he should be aware that this also requires the pendulum to swing away from the regulations. Currently the single objective pursued by the regulators, with their strict minimum capital requirements for the banks based on default risks and the empowerment the credit rating agencies as the supreme risk overseers has nothing to do with transformational impact but, ironically, only with avoiding a financial crisis.

Lawrence Summers also holds that "we need to reform tax incentives that encourage risk taking, regulate leverage and prevent government policies and prevent government policies that give rise to a toxic combination of privatised gains and socialized losses." He sounds so right, but he is so wrong. The privatization of gains and socialisation of the losses has nothing to do with the regulations per se but with the lack of the know-how and the political will of how to react when the regulations fail. And, specifically on risk, what we most need is to encourage the right risk taking as it is the oxygen of human and economic development, while avoiding creating disastrous risks in areas like housing and that, almost by definition, should be among the least riskiest parts of our economy.

The right intention but for the wrong intervention

Sir Johnny Munkhammar and Dick Kling tell us the “World needs less government intervention” October 27 and, in general, I agree. That said when they say that “The US, government, on a massive scale subsidized home loans to people who could not afford it” they are dead wrong, and they should be able to see that those incurred losses doing so were mostly private investors, who are now paying the costs and perhaps receiving themselves, as investors, a massive subsidy from the government.

And so if we are going to do well with less government intervention, let us get rid of the worst, namely the minimum capital requirements for banks based on vaguely defined risks and the risk information oligopoly awarded to the credit rating agencies.

Did Congress never ask Greenspan about his opinion?

Sir with reference to your editorial “Saying sorry” October 25, if anyone had answered “I presume that the self-interest of organizations, specifically banks and others, is such that they are capable of protecting their own shareholders” we would never ever dream of appointing said person to anything that has to do with banking regulations. Since this is what Alan Greenspan now tells us he always believed does that imply that, in their confirmation hearings, the US Congress never asked him about his views? Can Bernanke be hurriedly recalled to Congress for a brief follow-up question?

The saddest part of the story though is that had only Alan Greenspan regulated according to his beliefs, he would never ever have imposed upon the banks the opinions of some few credit rating agencies, and these agencies would therefore never ever have been officially empowered as the supreme risk guides, and therefore they would never ever have been so much enabled to have so much of the market follow them over the subprime precipice.

Global confusionism!

Sir Philip Stephens in “Globalisation and new nationalism collide” October 24, tells us that the summit of world leaders announced by Bush in order to “advance common understanding of the crisis” would be a success “if the leaders did no more than reach the beginning of understanding”, which presumably means admitting, like Greenspan, that they never understood much of the boom either.

But the summit could also be helped by each party bringing forward mutually helpful proposals. For instance China had a business model based on lending the US money so that it could buy from them which thereby creates jobs the Chinese. And, as so many business models do, it did fine until, in this case until the US could not afford to take on much more debt. What now? If they do not lend the US more money, Chinese could lose their jobs and China could lose a lot on their actual dollar loans to the US.

It might therefore be time for a US public-debt to Chinese jobs conversion plan. In it millions of Chinese workers would pay 10% of their gross Chinese salaries to the US in order to retain an access to the US markets. At a Chinese salary of 500 dollar per month, to repay this way the current 1 trillion dollars of outstanding US debts to China (no interests), that should take only about 10 year, for only about 167 millions of Chinese.

Are you also to tango away your public-debt?

Sir, of course we understand that you do not ask how much it costs when you send out a fire truck to answer an urgent alarm, but from there to imply that it will not costs us any money, as Sir Samuel Brittan, seemingly a Laffer curve believer extraordinaire, like us to think, is a bit too stiff upper lip or too blasé for my taste. “The big myth of taxpayer cost” October 24.

If it was that easy why do we not all have ourselves a couple of fiscal stimulus packages a day? It is just like listening in to the many statements about the US bail-out plan becoming profitable. If so, why does the US Treasury not take over all investment banking activities and save us all from having to pay any taxes?

Incredible amounts of virtual monopoly-money-wealth will burn up in the current crisis but the public debt will remain real; and could become too large to handle and perhaps force you down the Argentinean route, in order to tango it away.

What bond of trust is he talking about?

Sir Alan Beatty titles his report on Congress hearings about the credit agency’s role in this current crisis quoting Henry Waxman the chairman of the of the US House of Representatives oversight committee saying that the rating bodies “broke bond of trust” October 23.

Hold it there… what bond of trust is he talking about? Most market participants were never aware of the existence of any bond of trust, except perhaps of one with their regulators. Most market participants simply thought that the credit rating agencies knew what they were doing. And why should they not think so when even the financial regulators thought so?

Let us now pray this was the last waking up from a wish-dream for a while

Sir Martin Wolf rightly calls out the fact that “The world wakes from the wish-dream of decoupling” October 22, although, sincerely, I have yet to meet anyone that was not long in emerging markets that really believed in that.

But when Martin Wolf, sounding a bit like a financial policy macho-man, says “this requires Keynesian remedies. Budget deficits will end up at levels previously considered unimaginable. So be it.” we must now pray for not having to wake up from another wish-dream where budget deficits were decoupled from the lack of confidence in currencies and the consequential inflation.

I would be much more comfortable recognizing that there are some real limits to budget deficits and thereby force the need to assign priorities intelligently to what can be done.

In doing so, I would absolutely agree with Martin Wolf that one of the first things to be done has to be “enhanced procedures for restructuring debts of bankrupt households” since the only way we could be sure of that what in that area is being done is sufficient, is that whatever remains in the mortgages duly merit the triple-A rates previously wrongfully awarded.

End of story…now what?

Sir how sad that the Washington Consensus is just a mythical phrase coined by John Williamson and not a document or a statue because, if it was, we could at least burn or topple it just to get over it, once and for all, and save us so much unnecessary obsessed rambling about how malicious it was, even though most of us agree that whether the recipes in that consensus worked or not had mostly to do with what ingredients were used, who cooked and how the cooking was done.

In “The Fund faces up to the competition” David Rothkopf, October 22, sort of gleefully talks about the IMF having soften their conditions for helping out, without reflecting on the possible fact that they now are just prescribing painkillers instead of remedies, because they, like all, have run out of answers.

The alternatives that Rothkopf seems to favour as he says that “Mr. Chávez distributed four times as much aid in South America” are plain ludicrous since the source of that help is the higher price that has to be paid for oil; and for countries like Honduras and Nicaragua no aid comes even close to being as significant as the remittances sent by their workers, from the US.

The Washington Consensus as interpreted and implemented did not work, at least so we think, end of story; and so now what?

The Basel Consensus on bank regulations has demonstratively really not worked, but there we have unfortunately not yet reached the phase of “end of story, now what?”

FT, be very careful going there!

Sir you say “Pakistan needs IMF help badly” October 22, and that the Fund should be flexible without compromising on reform. Sounds right! Then you argue that Pakistan should spend more on education and less on the military which also sounds right until… “The country has an unresolved conflict with its archrival, India, over Kashmir; has been sucked into fighting on its Afghan border; has a weak government; and is nuclear-armed” and then I am not so sure. What has to be searched for with urgency, the timing could be good as the crisis will afect India too, is an immediate search for how to solve the conflict since the last thing you would like to do to a nuclear-armed party is to weaken his other options.

Keep it up Jennifer Hughes!

Sir we have all been following for some time now Jennifer Hughes spirited and continuous defence of the accountants with respect to that they should not be forced to do the dirty laundry for the financial regulators and be forced to be more flexible on their mark to market principles. Since I am not an accountant and I have quite often been a bit critical of them (especially on the issue of the few big accounting companies left) I could have easily been tempted to join the choir had it not been for Jennifer Hughes´ very sensible reports. We much appreciate her efforts.

The market is what it is and how then everyone accommodates to it is a completely different issue. If flexibility is what is needed then let the regulators be more flexible. I for instance cannot believe how the regulators, so far into the downward rating spiral, still force the banks to take into account for their minimum capital requirements the by now quite discredited opinions of the credit rating agencies.

Yep 9 different credit ratings per security would do it!

Sir Roman Frydman, Michael Goldberg and Edmund Phelps tell us that “We must not rely solely on the rosiest ratings” October 20, and that “No single individual or institution can render a definitive judgment on the riskiness of securities. Friedrich Hayek showed that only markets can aggregate knowledge that is not given to anyone in its totality”, which is of course absolutely right.

But then they tell us “Rating agencies and issuers of securities have to help the market perform this function” and in order to do so “when assessing an asset, agencies should be required to report at least two ratings and the methodology used to arrive at each: one assuming that historical patterns will continue and at least one other assuming the reversals in the trends of major variables” which is of course totally incongruous with their first statement.

Unless their idea is to have the credit rating agencies reporting so many scenarios that they dilute themselves in a sea of irrelevance… Yes, that is an idea on how to get rid of the credit rating agencies without having to tell them so. Let us ask for nine scenarios covering the range between an AAA and a Caa2!

Thou shall not induce the markets to trust some particular information agents

Sir, in the Life & Arts of October 18, in very small letters, your readers are told they can go to ft.com/magazine for an article on how the credit rating agencies got it so badly wrong… which sort of implies that the human frailties present in the CRAs could somehow be avoided in the future… and so that we could trust the CRAs even more. 

Is the FT building up some defences against an accusation of having downplayed the role of the CRAs in this crisis? Do you not think this article merited to be printed in the Financial Times; when the world is so dumbfounded confronting a financial crisis of immense proportions and the role of the credit rating agencies lies at the heart of it? 

The article “When junk was gold” by Sam Jones is not bad but does not classify as good either, since one cannot understand how he could have left out mentioning how the bank regulators in Basel, in the mid 90s, empowered the credit rating agencies with oligopoly rights in the risk information markets, and thereby elevated exponentially their influence. Sam Jones writes “lawmakers may not have the appetite to go after the rating agencies. 

The world’s financial markets have credit rating hard-wired into them… going to an investor-pays model is probably too big a change to ask for more broadly. American and European market regulators seem happier to push for a much-reformed status quo. 

I am not so sure of this. Just like there are many new regulatory proposals based on identifying and managing the behavioural patterns in the relation between borrowers and lender, there are also many like me who argue that the behavioural patterns between security vendors and investors has to be realigned, and in this respect consider that the number one reform needed, in order not to repeat mistakes that could be even more catastrophic, is for the regulators to avoid empowering any supplier of information in any special way.

Just as I warned against the introduction of a systemic risk in a 2003 FT letter

Can we trust the taxpayer?

Sir, Martin Wolf in “Governments have at last thrown the world a lifeline”, October 15, though duly acknowledging all the many risks still has the rose-tinted glasses on, especially when comparing the size of the estimates of how much the financial systems needs to be helped with that of the overall size of the economies. Nothing wrong with that, in fact, a good citizen-journalist has a responsibility to keep on smiling even when it is with a stiff upper lip.

But thinking about the growth of other fiscal demands; the decrease in fiscal offerings that the current crisis will create; and being less optimistic than Martin Wolf about the government’s capacity to claw back the fiscal assistance they now provide, without the help of “creative” fiscal accounting, it is also time to responsibly talk about the lifeline to governments, namely the taxes.
The dollar bills, for which value the US is responsible, have printed on them the brief prayer of “In God We Trust”. A more substantial version would be “In God We Trust to see that the politicians and the bureaucrats do not print and circulate more dollars that what the economy could back or, otherwise, that the American taxpayer finds it in him the capacity and the willingness to pay taxes so as to make up any shortfalls.”

Can we trust the taxpayer? I am not at all sure of that. I have the impression that the various “bubbles” have also helped to disguise that our tax systems have lost much of their credibility, and the world seem to be screaming for more progressiveness of taxes, at least so as to take care of the fat-cats.

In this respect we need to find new equitable taxes that are aligned with the new global realities, and that interfere as little as possible with the functioning of a competitive economy. Thought there has been some loose talk of flat-tax, carbon-taxes and financial transaction taxes we have not really seen much of tax-development for many decades now.

That they did not know it does not mean they should not have known it!

Sir John Kay in “Banks got burned by their own ‘innocent fraud’”, October 14 writes: “Is the deception of others more or less venal when one has also deceived oneself? That question must be left for moral philosophers – and historians of our era – to answer”.

Absolutely not! We cannot afford to leave this question to moral philosophers or historians.

The question that John Kay poses paints out the possibility that the guilty party is innocent because it “has also deceived” itself and this, in this case at least, is unacceptable. The Financial Regulators should have known that creating a system that empowered so much so few with providing information to the market as the regulators did with the credit rating agencies was bound to lead to a crisis like the one we are having.

The Financial Regulators might argue that “they did not know it”, but that only puts the burden squarely back on us to place the regulation of the financial sector in the hands of persons capable of knowing such fundamentally simple things of life and financial markets.

The system was not overwhelmed by innovation it was overwhelmed by negligence

Sir I bet that Clive Crook does not know of anyone who knows of anyone who knows of anyone that has lost a single dollar giving a subprime mortgage on too generous or outright stupid terms to anyone who classifies as belonging to a subprime sector.

But I do bet that Clive Crook knows of many persons or institutions that have lost fortunes investing in securities collateralized with mortgages just because these securities were rated AAA by one, two or even three of the three credit rating agencies that everyone, including the financial regulators uses.

In this respect unless Clive Crook classifies a mortgage given on stupid terms as an innovation he is absolutely wrong about “A system overwhelmed by innovation”, October 13. The system was overwhelmed by the sheer negligence of those sentries that the regulators appointed and empowered, the credit rating agencies, and the negligence of the regulators and the market participants who thereafter went to sleep in the belief they no were safe.

FT… how come?

Sir I refer to your Special Report World Economy 2008 published with occasion of the meetings of the World Bank and the International Monetary Fund in Washington this week.

In it Paul J Davies in "High noon chimes for collateral with no name" says "A system that simply trusts in collateral without regards to its particulars is one that fosters the creation of ever more hideously complex problem". Since the principal reason for the current turmoil is not that the system trusted too much the collateral but that it trusted too much others to do their job of analyzing it, I would have worded it instead as "A system where participants are led to believe so much in the opinions of some few credit rating agencies…"

Also Norma Cohen in “Race against the storm” mentions that “The infection in the credit markets, by all accounts, began with mortgages, specifically those to borrowers with poor and patchy credit” but this completely ignores the fact that most of the market did not lend to borrowers with “poor and patchy credits”, most of the market bought AAA rated securities.

UNCTAD for instance is perfectly clear about what has happened and in their policy brief titled "The Crisis of the Century", released on October 6 they state "There are a few quick regulatory fixes that can be taken at both the national and international levels. The first is to reassess the role of credit rating agencies. These agencies, which should solve information problems and increase transparency, seem to have played the opposite role and made the market even more opaque."

Now in your 12 page special report, surprisingly, the credit rating agencies are referenced only once, and that is when you have to report on the opinions of Christine Lagarde, France’s finance minister.

How come? What strange and dark silencing forces are in action at the Financial Times? They seem to be much present at the World Bank and IMF meetings too.

I have saved a copy of this Special Report by the Financial Times as evidence… though I do not know of what, yet.

Why does Martin Wolf keep mum!

Sir Martin Wolf in “Asia’s revenge” October 9, (the why for the title is not very clear), spends many paragraphs describing the accumulations of huge surpluses with many origins that recycling went to pursuit better opportunities in the US and failed miserably. Wolf puts much of the blame on a “housing bubble” but as he admits this is partially a circular argument since part of the house bubble was also a response to the huge demand for investments those surpluses created. Also let us remember that in all other countries, house bubbles as large as or even larger than that in the US, have not resulted in anything as destructive like what came out of the build up of financial instruments around the subprime mortgage sector in the US.

Wolf quotes Carmen Reinhart and Kenneth Rogoff saying “Over a trillion dollars was channelled into the subprime mortgage markets, which is comprised of the poorest and least creditworthy borrowers within the US” and which is of course true. The question though is how come Martin Wolf avoids even posing the most natural and most important question of… How come they did that?

UNCTAD in their policy brief titled “The Crisis of the Century”, released on October 6 state “There are a few quick regulatory fixes that can be taken at both the national and international levels. The first is to reassess the role of credit rating agencies. These agencies, which should solve information problems and increase transparency, seem to have played the opposite role and made the market even more opaque.

And of course Unctad is absolutely right. It was the credit rating agencies, empowered by the regulators that guided the recyclable funds into subprime swamplands.

Again, why does Martin Wolf keep mum on it?

Unctad more on top of financial issues than FT?

P.S. Why can I be accused of monomania, writing so much on what I believe is the very harmful error of empowering the credit rating agencies too much while those ignoring this blatant mistake are not accused of a similar obsession?

Don’t even dare to paint a rose garden!

Sir one think is to minimize the costs for taxpayers of the financial crisis but to say that “Taxpayers should benefit from any upside as a result of a recapitalization” points to a whole different ballpark, “Bold moves to fight fire” October 8.

Creating illusions of profits for the tax-payer sounds like a good natured Ponzi promise but that, if really believed possible, will most certainly end up making it all even more costly to the taxpayer.

First take a time-out to think about the purpose of our banks.

Sir Martin Wolf in his “It is time for comprehensive rescues of financial systems” October 8, seems to be responding to panic, with some panic. Better focused is John Kay when in “Public assistance must first protect the taxpayer” he tries to limit the panicky reactions reminding that “when governments intervene in the banking crisis, their objectives should be equally narrowly focused and on what matters to the public and not what matters to the banks.”

Wolf mentions that the finance ministers and the central bankers who will soon convene in Washington “must travel with only one task in mind: restoring confidence” I agree, though I must ask… confidence in what or whom? It is important for these leaders to take a brief time-out first in order to think about what the purpose of our banks should be. They have not done thought about it for the last couple of decades, ever since the bank regulators convinced them that the only important thing in life was that banks should not default.

As a foreigner in the USA I am truly amazed with how much societal importance is given to credit scores… as if that is what life is all about. Pushing credit down the throats of people, for instance with subprime mortgages, cannot and should not be priorities of banks, at least not those that merit taxpayer bail-outs when things go wrong.

Yes, availability of credit must urgently be restored… but given our limited resources is equally urgent to prioritize what most urgently needs and merits credit. Is putting a floor under real estate a priority? Perhaps, but surely only as long as that floor stand not in the way of young people searching for affordable housing solutions.

No, it was the regulator who overshot his limit!

Sir Gideon Rachman's "Conservatism overshoots it limits" October 7, evidences that so many are still fooled by appearances. Rachman writes about the "fervent faith in the market" while blithely ignoring the fact that the single most important origin of the current crisis was that the financial regulators put their whole faith in the credit rating agencies to measure adequately risks, whatever they meant by that, and that in doing so they empowered the credit rating agencies to exercise undue influence over the markets.

Instead of speaking about the investment bankers as the shock-troops of the Reagan-Thatcher revolution, I wonder where he gets that from, he should better speak about the shock-troops of those who held such a fervent faith in regulations they believed they could drive risks out of the financial system for ever. The fact that credit rating agencies are dressed in private clothing should not confuse anyone, for all practical purposes, they are just risk measuring Kommissars bureaucrats working for a financial regulator who clearly overshot his limit.

The only reason why "regulators and politicians [and investors] believed so firmly in the magical and self regulating qualities of the market" was that everyone believed the sentries sent out to keep an eye on it would always be awake.

Rachman quotes Greenspan rhetorically asking "Why do we wish to inhibit the pollinating bees of Wall Street?" It is now high time to ask Greenspan´s successors "Why should we keep on inhibiting the risk measuring diversity of the market?"

Be careful in not promoting the dark ages

Sir John Eatwell and Robert Reoch in “‘Greater transparency’” will not reduce systemic market risk”, October 7, conclude that “Those who argue that greater transparency is the answer don’t understand the question”. Since, to get there, they argue that “Greater transparency means more firms share the same information” in which obviously they are right, but follow up with, “and have access to the same procedural knowledge and even the same modelling” and which obviously has absolutely nothing to do with transparency, it is clearly they who don’t understand what has happened.

The information on how badly the subprime mortgages were being awarded was out there for anyone to see, had they taken their time. The problem arose in that no one felt there was a need to do so, after the regulators non-transparently favoured few information digesters, the credit rating agencies, to do the modelling and number crunching on behalf of everyone.

Genovia goes back to gold!

Sir no one could dare argue against the wisdom of keeping cellar space for wine, that could be so much needed to help celebrate that what you have invested in gold does not glister, which is something like celebrating that no one has collected on your life-insurance policy, or drowning your sorrows because all you got left is gold (and the wine you are drinking) as all the rest has become worthless.

Of course rushing into gold can as you say be a risky business, “All that glisters” October 6, but let us also remember that for those blessed with resources to do so, not keeping something in gold might be even more risky.

These day’s I have much wondered what would happen if on FT’s front page the principality of Genovia announces that they are indeed going back to gold parity. If Ireland can run their “brave” guarantee schemes, why cant Genovia?

Goodbye blissful ignorance!

Sir you insist calling it a “bail-out” plan, when it could just as well turn out to be a take-down plan. The whole world will be watching how the 700 billions are spent putting pressure on buying as cheap as possible and…who is going to be able not to market their investments to the results of this “bail-out”. Goodbye blissful ignorance!

The mother of the differences between intentions and outcome.

Sir in reference to John Authers’ “Consequences game plays out to bitter end” October 4 he leaves out the most stunning divergence between intentions and outcome which happened when the regulators tried to live out their bedroom fantasy of a world without bank defaults and created their minimum capital requirements for banks based on risks and appointed the credit rating agencies as their Kommissars of Risk… and just look at where that got us.

Though of course, some of us have been saying for years, that this is exactly the consequence of trying to micromanage some risks in an ocean of risks.

And what about the Basel Consensus regulators?

Sir John Willman in his “Fear and loathing in the aftermath of the credit crisis” October 4 dares not to speak about what will happen to those Basel Consensus regulators that got is into this systemic risk-information leveraged financial crisis.

If you set up a system that is composed of a.- minimum capital requirements for banks that are based on risk; b.- the empowerment of few agencies to measure the risks; and c.- the need to immediately respond and mark to market the consequences of any change in the perception of the risks, then you have gathered up the necessary and sufficient elements to guarantee that, sooner or later, you will suffer a financial tsunami, exactly along the lines of the one we are currently seeing.

Are the regulators incapable of learning?

Sir in “Brussels stiffens bank capital requirements”, October 2, Nikki Tait reports that there is legislation coming that will “require credit rating agencies to register and meet standards if they wish to operate in Europe.” Does this mean that now at long last we will be able to really trust the credit rating agencies? Are the regulators incapable of learning?

It was not magic…though it might be.

Sir John Gapper in “The banker’s fall will be fatal” October 2 writes: “In mortgages, Wall Street found a magical combination of financial leverage and lack of transparency… that allowed investment banks to make money from information-starved investors.”

Not true! John Gapper knows well it had nothing to do with magic and all to do with that credit rating agencies were empowered by the regulators as experts on risks and guides to no-risk land and hey messed it up, as had to happen sooner or later.

And so, if on magic, the real question is… what have the credit rating agencies and the regulators done to John Gapper so that he is capable of ignoring the facts?

They must evidence why the bail-out is not give-away.

Sir Martin Wolf in “Congress decides it is worth risking another depression” October 1, with respect to the failure of Congress to approve the bail-out plan writes that “It is understandable because the use of taxpayers money to buy so-called “toxic” mortgage-backed securities from the greedy fools who created the crisis is hard to tolerate”. With it, unwillingly, he helps to reinforce the belief that there will be a considerable give away of tax payers money to the monsters. Of course if Martin Wolf really believes that to be true, then he should of course object to the plan, no matter what.

The objective of the plan is to try to establish a market price for instruments no one knows what they might be worth; and its biggest problem is that it was never sufficiently explicit on how they intended to go about so as to avoid giving away tax payers money. If the plan from the very beginning had been limited to the use of reverse auctions, to acquire a certain low percentage of many different tranches in many different issues, we might not have fallen into the current quagmire.

By the way there was of course much greed greasing the road to crisis, but the qualification of “fools” needs to be reserved exclusively for the regulators who thought they could appoint the credit rating agencies as their sentries and then calmly go to sleep.

The bail-out plan needs to be spelled out better, really letter by letter.

Sir you say in “The bail-out failure and blame game” October 1 that lawmakers should ask for more “oversight rather than stricter regulation on how deals be arranged”. This would be right if it was possible to identify some responsible for the oversight that could be trusted by all. Unfortunately, this does not seem to be the case.

When, on the same page, we also read the letter from Krzysztof Rybinski and that describes the bail-out plan in terms of Hank and Ben wanting to give money to John and Tim because, drunk, the broke four windows a table and burned a sofa it really evidences how much more clarity is needed in order for everyone to know that the purpose of the plan is in fact to establish a present value for the windows, the table and the sofa, and so that damage assessments can proceed.

Now, if you do not spell that out letter by letter, how can one avoid anyone believing Mr. Rybinski is absolutely right?

Why does the Financial Times ignore the only legitimate children of the latest interventions?

Sir “In praise of free markets” September 27, you do not even mention that the financial markets are not free at all since they have to follow or are induced to follow the criteria of a few credit rating agencies that for all practical purposes are just outsourced government agents.

Also saying that “subprime mortgages grew because the subprime mortgage sector was dominated by Fannie Mae and Freddie Mac” blithely ignores the fact that it is indeed possible to provide the subprime sector with excellent mortgages, and which has been done for many decades, and hides the truth that what went wrong was that extremely lousy awarded mortgages were given wings to travel all over the globe because the credit rating agencies blessed them with their AAA.

You talk of the “child of other interventions” but you do not even mention the only two formally recognized legitimate children of the latest interventions and that are present in the current regulations from Basel namely the minimum capital requirements imposed on the banks based on a vaguely defined concept of risk and, of course the use of the credit rating agencies.

Why does the Financial Times ignore these children? Are you not free?

To restore confidence in banks you need first to restore the banks self-confidence

Sir in “Need for action on the banking panic” September 26, you open with a “Banks are not to be trusted” and you mention that this is the view of the public and policymakers, and that something needs to be done. You then propose very sensible steps, all with which I fully agree, but you leave out the vital task of rebuilding the self confidence of the banks, and that was effectively lost when the regulators declared the banks not trustworthy and imposed on them the credit rating agencies as the risk measuring experts.

My first action as a regulator would be to tell the markets…

“Hold it there, those that really got us all into trouble were the credit rating agencies and we are very sorry we empowered them so much. Therefore, effective immediately we suspend all the regulations that assign a formal role to the credit rating agencies. Truth be said, admittedly late, we do believe that the banks are more capable if they have all the authority to decide on their own what is best for them.”

There is a cultural war looming on the financial front

Sir Gillian Tett writes that the “Era of leverage is over” September 23 but sort of mulls over the fact that leverage is not an absolute financial value but only another dimension of risk, since a zero leveraged investment in something risky could be more risky than a 100:1 leveraged investment in something less risky. The problem, as always, is who is to determine the risk.

When Gillian Tett mentions that “Basel Two capital rules will now force banks to hold more capital against esoteric assets” it is a great moment to remind ourselves how extraordinary little esoteric those lousily awarded mortgages to the subprime sector really were.

In the US there is a lot of talk about a cultural war breaking out on the political front but the stage is also set for a cultural war on the financial front; between those who believe that markets should be allowed to freely determine risks and those who believe in soviet-styled-central-planning and feel that, even having to face the current disaster, this is best left in the hands of official risk-kommissars, which is what the outsourced credit rating agencies really are.

If only we knew where Münchau’s 100bn of losses where

Sir Wolfgang Münchau does a great job reducing a 62.000bn market size of Credit Default Swaps down to “possible losses [that] might be below 100bn.” “Defaults will test a fair-weather construction” September 22.

Though I believe he is entirely right in his assumptions, the journey there is fraught with dangers that could attempt against reaching such a favourable outcome, like “offsetting claims in the other direction” is not easy when so many counter-parties are immersed in confusions of their own, and no one seems capable to answer…Where are those damn 100bn?

Have a nice cuppa tea.

Sir Gillian Tett gives the best and most timely advice I have yet heard in these days of financial turbulence… “have a nice cup of tea”, “Calm must prevail in war of psychology” September 22, good for her. If Paulson could benefit from reading up on the Swedish model of handling a bank crisis he would also do well by mustering a very British stiff upper lip.

P.S. Living in the US I am fed up though with the word “prevail”

But bad information was leveraged even more, sort of a million to one

Sir, John Plender writes in Capital in convulsion about “toxic assets” and that “allowing investment banks to be leveraged to the tune of 30:1 is like Russian roulette with five out of the six chambers loaded”, September 20. Yes, but let us not ignore that most of the toxicity has less to do with the assets as such and more with the lack of understanding of them; and that it was the financial regulators that leveraged, sort of a million to one, the impact of bad information flows, and effectively turned the credit rating agencies into single chambered guns loaded with nuclear devices.

And… what about the folly of a generation of Editors who did not question sufficiently?

Sir, you are the Financial Times, and in “Central banks: a survival guide” September 19, you dare, without blushing, refer to the “follies of a generation of irresponsible financiers”? Where does that leave you? Did you “without fear and without favour” ask, timely, the questions that needed to be asked? Like, is it not an arrogant folly to believe risks can be measured, so completely that thereafter you can place our global financial risk surveillance in the hands of some few credit rating agencies without concentrating the risks?

When I started my TeaWithFT.blogspot.com it was because I felt that the Financial Times “also need some checks-and-balances, of those that do not always have to be approved by the Editor”. I had no idea how right I was… though when I was told that in order for my letters to be published I should not send too many, I started to suspect it.

Sir, the current generation of financiers are not more or less responsible than past generations of financiers… they just got swooped up in some the crazy and uncontested notions of their times. In the words of Albert Einstein “It is harder to crack a prejudice than an atom”.

Take it easy on global rules…some global leveraging has already been too much!

Sir Philip Stephens in “After the crash: why global capitalism needs global rules” September 19, mentions that “mistakes of recent years have not been so much about the absence of regulation, but a failure to act. The central bankers and the regulators were simply asleep on the job”. I do not think Stephen is really aware of how right he is.

The regulators overregulated the imposition of sentries on the financial markets, the credit rating agencies, to watch out for risks and with that everyone went to sleep; markets, regulators and at the end even the sentries.

And so when designing next round of global rules it would be helpful to do so with the humility that comes from accepting that in the initial efforts of generating a good global financial public-goods, such as the use of the credit rating agencies, they seem actually to have produced a public-bad. If a subprime mortgage is awarded in an irresponsible way, you want to keep it local; you do not want to give them AAA wings to fly.

Worse than the admiration of the golden calf is the mutual admiration between the golden calves.

Sir David Bodanis in “How we were all blinded by the golden calf”, September 19, says “Raise an institution such as the unfettered financial world to the role of an idol and you are not critical of anything it does.” He is right though I would have to add that even more blinding than that is the mutual admiration between the golden calves.

Suffice to look at how all our financial regulators belong to the same club, with all the members having exactly the same set of mind and priorities in life namely “whatever… except for a bank-default, on my watch”; and where even those who are supposed to provide regulators with oversight overwhelmingly belong to the same club.

How is a club of mutual admiration born? One way is to create a debate forum reserved for “the world’s most influential economists” and then make sure that you never analyze why the members of the group did not help to influence in averting disasters like the current financial crisis.

It was the regulators that initiated the fetishisation of the credit rating agencies

Sir Paul J. Davies in “The false of security at the heart of the credit crunch” September 19 relates how Peter Fisher, a former undersecretary for domestic finance at the US Treasury explains that it was the financial systems extreme “reliance on the supremacy of secured asset based lending” or the “fetishisation of collateral” that made a necessity out of the credit ratings agencies, because a “credit rating is the bare minimum that can be taken in lieu of any real inquiry into a borrower’s cash flow”.

Absolutely not! First, there is nothing wrong with secured asset based lending if the value or cash flow generated by those assets has been correctly assessed. Second, a credit rating, if done right, should of course include a real inquiry into the borrower’s cash flow. The fetishisation of the credit rating agencies occurred primarily because the regulatory authorities declared the credit ratings so correct that they could be used, for instance, to determine the minimum capital requirements of the banks. And, lets be frank, if the regulators believed that much in the credit rating agencies, how could you really expect stop that kind of blind-faith from permeating the rest of the market?

Let us make good and permanent use of our disorientation.

Sir Gillian Tett writes that “Gridlock and panic follow loss of compass” September 19 and wants to know “how to end the disorientation”. As I see it though our current problems derives more from the regulators having imposed too much orientation believing themselves and making the markets to believe that a financial risk compass was just like any other compass.

In this respect we should perhaps welcome our disorientation and use it to diminish dramatically the role of the credit rating agencies, so that we do not follow them next time around over a precipice even more dangerous than that of the lousily awarded subprime mortgages.

The risks never gone are now coming back with vengeance.

Sir Roger Altman in “Modern history greatest regulatory failure” September 18 ascribes this to the extraordinary leverage that some institutions took on and the development of a huge financial system outside the normal banking network.

He is right in the secondary causes but the origin of the whole leisured and blasé attitude to risks of the market that allowed for leverage to happen had its origin in the crazy notion that you can have some credit rating agencies correctly measuring risks without creating systemic risks; and the push for a system outside of banking was a direct result of the regulatory arbitrage that arose when the regulators imposed on banks minimum capital requirements based on risks.

Everyone were busy congratulating each other they had beat the risks and so everyone relaxed… and there you have it, the risks never gone are now coming back with vengeance.

Martin Wolf (even when told) does not discern the gorilla in the room

Sir Martin Wolf writes about “a shift in the psychology of supervision away from the presumption that institutions know what they are doing”, “The end of lightly regulated finance has come far closer”, September 17. It is further proof on how many can’t see the gorilla in the room, even when told.

If a father tells his son “you can go anywhere you want as long as you take your governess with you” is he being a trusting father? No! Just like the current regulatory system that obliges the financial sector to take the credit rating agencies with them wherever they go cannot be regarded as a liberal letting the sector free to roam.

The credit rating agencies were the governess and the gorilla in the financial sector. The investors who were all very strongly signalled by the regulators to heed their opinions, let down their guard and went where the credit agencies told them there was no risk to go, for instance into the land of the securities collateralized with lousily issued subprime mortgages.

Martin Wolf refers to John Kay opining “regulators cannot successfully second guess the decisions of huge institutions staffed by better paid and more highly motivated people than themselves”. That is exactly what the regulators were doing when they outsourced risk assessments to credit rating agencies and imposed them on the markets.

In a letter to the Editor of the Financial Times published May 11, 2003 I said “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds". To me my comment illustrated what should be a natural concern for financial regulators expected foremost to be wise… but they did not seem to care. To me my comment illustrated what should be a natural concern for all influential economists and financial experts… but no one of them said a word. How come?

In being able to answer that question, forthrightly, lies the way out of our current financial predicaments and our only chance for not ending up someplace even worse... which is always a possibility.

All financial literature is crowded with the concept of a “risk-free rate”, google it, and though it is accepted as only a theoretical construction, think about what just those two words, “risk-free”, could be doing to inflate our regulatory egos and instincts.

Accountability, for all!

Sir I find it strange to say the least that a professor of economics at Harvard University and a former chief economist of the International Monetary Fund can write an article as “America will need a $1,000bn bail-out”, September 17, from such a detached observer’s point of view, as if he had absolutely nothing whatsoever to do with the current mess.

Where was Kenneth Rogoff when a world needed to be told that, as a financial regulator, you just do not go out and decide that risk can be measured, and outsource that measurement to a few credit rating agencies, and tell the banks they have to raise capital in accordance to what those few credit ratings opine, and then think that nothing systemic would come out of that?

Accountability Professor! You too!

What U.S. risk is FT exactly referring to?

Yesterday, September 10 FT had on its first page a report signed by Krishna Guha Michael Mackenzie and Nicole Bullock that spoke about “the cost of insuring against a US default crept higher” and referencing a price for insuring that “implied that the US was more likely to default on its obligation than” several other countries.

Today, September 11, John Gapper in “Take this weekend off, Hank” apparently also finds a need to mention “that credit rating agencies had to declare to the investors that the Fannie and Freddie bail-out would not affect the country’s triple A sovereign rating.”

Given that US debt is issued in dollars, what exactly does this U.S credit risk insurance that you are talking of cover? The risk that they will run out of paper and ink at the US Bureau of Engraving and Printing?

But then where were the world’s most influential economists?

Sir Martin Wolf asks of the US government to “spare us homilies on the sacred role of free financial markets for a long time” and with sarcasm refers to financial geniuses that transmuted simple assets into assets so non-transparent that the market ultimately imploded”, “America’s housing solution is not a good one to follow” September 10.

It leaves me asking where were all the “world’s most influential economists” when they were needed to alert that allowing the financial regulators to impose the credit rating agencies on the markets so much made them far from free and was plain crazy since “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”? The last quote is from a letter published in FT on May 11, 2003 and written by someone unfortunately not sufficiently influential, namely me.

But at least now we know that skies can indeed fall!

Sir Martin Wolf's laudable exercise in citizen responsibility "Why the sky may not be falling", September 5, asks whether, besides Gordon Brown, "anybody else believe the business cycle could be eliminated?" The answer, unfortunately, is yes.

All those financial regulators who empowered credit rating agencies to act as traffic cops directing the flows of funds flashing their risk signs; and believed the tall tale that the risks could be diluted in the global oceans or managed by those able to do so, also believed implicitly that the business cycles could be eliminated and that the sky could not fall.

Donors should cap aid concentration in Africa… and everywhere

Sir, coming from an oil cursed country (Venezuela) and knowing too much about having to live with governments that are made wealthy independently from their citizens, I absolutely agree with the general concept that Adrian Wood expresses in “How donors should cap aid in Africa” September 3, though I cannot understand why he makes a specific exclusion in the calculations of the revenues from oil and minerals.

If we are to have sustainable democracies, where governments are accountable to their citizen, then a rule that caps all the revenue that the State obtains, whether from aid, oil or whatever not paid directly to it through non-coercive means by their own citizens, to a certain percentage of GDP, for example 5 percent, and otherwise obliges that all aid (and hopefully oil revenues too) is distributed directly to the citizens would seem like a much better alternative.

You should not impose a limit on how much help donors want to give, not with the many needs at hand, nor at how much a citizen could receive, not with the many needs at hand, and I do not know of any such limit that has helped a developed country to develop, but, you sure could help to impose limits on how to avoid to concentrate the aid given and received in too few gubernatorial hands. Please go ahead!

What derives from what?

Sir we used to believe derivatives derived from the market but each day that passes, with articles such as "Derivatives law sheds light on the financial ripple effect" Aline van Duyn, August 29, we suspect that it could equally be that it is the market that derives from derivatives.

This reminds me of what I have always felt about the issue of immigration and securing the borders, namely that whenever you build a wall you cannot be absolutely sure you end up on the right side of it.

The minimum minimorum of exiting Iraq!

Sir your “Exiting Iraq”, August 26, concentrates mostly on the logistics of getting out, like not leaving permanent bases and receiving legal immunity for the forces. After so much suffering can we not be more ambitious?

I was never in favour of the invasion of Iraq but, once it occurred, I pleaded for a scheme that would put its oil revenues directly into the pockets of all the Iraqis, and thereby set an example that could help to empower the democracy in all the other countries that are cursed with the centralization of their oil revenues… the mother of all oil curses. Unfortunately, the supposed builders of democracy forgot bringing with them to Iraq such a fundamental building block.

Now, when exiting Iraq, as a minimum minimorum, we should at least aspire that the next Saddam Hussein, whenever he will appear, should not find it easier to be the next Saddam Hussein… much the same like the next Bush, whenever he will appear, should not find it easier to be the next Bush.

Financial traffic jams are also caused by financial Global Positioning System

Sir we are grateful to Christopher Caldwell for drawing our attention to "Traffic" by Tom Vanderbilt, "Caught in the human traffic", August 23. From what we see that book should urgently be made obligatory reading to all bank regulators in Basel, so that they learn what happens when you impose credit rating agencies as the Global Positioning System supposed to direct the financial flows of the world.

That "Predictions about traffic become 'self-destroying'" is exactly what lies behind that systemic risk that brought us the subprime mess. They should have known it!

"Once everyone gets the same reliable real-time information about traffic everyone mobs the same route" questions the whole underpinnings of our current bank regulations, namely that you are able to measure risks without affecting the risks.

When the book quotes German physicist Michael Schreckenberg "telling them the whole truth is not the best way" we begin to understand Angela Merkel's request for a purely European credit rating agency.

We need to look at other possible explanations than trade

Sir Jagdish Bhagwati in “The selfish hegemon must offer a New Deal on trade” August 20, complains that “the labour lobbies believe, without any compelling evidences, that the American wages have been stagnant because of competition from the developing countries”. But, even if he is right, since he offers no other alternative explanation for the widening gap between the returns to capitals and the returns to labour in the economy, he is actually helping to keep the focus on trade as being the culprit.

Bhagwati would serve his worthy cause better by pointing out the effects of other developments that have run in parallel to the growth of global trade. How much of the capital-labour gap could be explained by the following?

1. The discrimination implicit in risk based pricing that has allowed the financial sector to charge some groups with extremely high interest, based on some quite dubious logical reasons. Borrowers that cannot pay the high interests should not have received the loans to begin with, at least not at those high rates, and those who can serve the loans have de-facto evidenced they merited lower rates.

2. The growing tendency to use intellectual property rights of all sort and kinds to create unregulated monopolies that capture rents.

3. The increased regressiveness of taxes that results from the tendency of turning away from taxing income to taxing consumption.

Net out the effect of those three factors and you might not have anything left to blame trade with.

Indeed how will this risk-based priced consumer generation respond?

Sir Aline van Duyn is exploring vital terrain in “Hard-pressed consumers refuse to read from script” August 18 analyzing how this generation of “risk-based priced” consumers will respond.

Just for a starter there must be a world of difference between having you credit worthiness assessed in an eye to eye conversation by a lending officer and today’s having a computer read you number. At least it must be affecting the moral implications in the “to pay or not to pay”.

I suspect we will also see a growing reluctance from the high interest rate payers to remain in that group since if they can service their debt adequately at those rates they might feel they are de-facto meriting lower rates.

Risk based pricing, which is similar to placing persons that after some doubtful genetic test are presumed to be especially exposed to an illness in a separate insurance pool, could be causing much of the growing social inequality that is currently attributed by some to globalization. Risk profiling, for a discriminatory purpose, is prohibited in most spheres of our social relations, except in lending where it is very much cheered, by most.

On unwelcome advertising

Sir John Gapper in "Advertisers will see you read this", August 14, describes very well how the advertisers wish to obtain more and better information on our habits and how this could intrude on our rights to privacy.

That said let us also not forget there are occasions when it is the website or the user who wishes to be identified better so as to avoid the messages or the publicity they do not want to see.

In Venezuela, a radical anti-U.S. website, but that still wish to generate some advertising income, because of its name revolves around "sovereignty", frequently attracts recruitment ads for the U.S. Marines. I supposed this must be of extreme nuisance to the owner of the site.

How do you nudge the Financial Times?

After having tried it and failed miserably I would love to ask Richard Thaler or Cass Sunstein about how to go about to nudge the Financial Times… firmly or gently? Any special tips?

It is impossible to fight graft when its origins are in the centralization of a big oil income

Sir you write in “Nigerian graft”, August 12, that “the most important battle at home looks likely to be lost” and yes, at current oil prices, the battle was lost before it even began. Any country where the oil revenues are centralized in the hands of government and where they come to signify more than for instance 5 percent of GDP and thereby make the government wealthy, independently of its citizens, will be swamped by graft, in whatever shades or colours it comes, whether open, hidden, informal or de-facto, whether in pseudo-democracies or real autocracies, whether in Nigeria, Russia, Saudi Arabia or Venezuela.

What an opportunity was missed in Iraq when someone decided not to implement an oil revenue sharing plan for its citizens! That way Iraq was condemned to a non functioning democracy and to living in graft.

Is FT backing Paris Hilton?

Sir you quote Paris Hilton saying something funny and smart on your first page, August 9, and then you have John Gapper write "The president of hedonism" with the leader of "The LA heiress is no average airhead" just to end up informing that what was quoted, "the script" as it is called, was written by somebody else. What on earth has happened to FT? Let the celebrities fight out among themselves but FT has nothing doing blatantly favouring one over another. This is a perfect opportunity for transparency and so, without fear, please disclose how this article came about.

And what about the AAA sails?

Sir Niall Ferguson, in “How a local squall might become a global tempest” August 8, tries to analyze how “primarily a US affair” and that according to him “has its origins in a US real estate bubble fuelled by easy money and lax lending standards” could extend globally and go nuclear in strength. I am sorry but he completely misses the story.

To talk as Ferguson does about howling winds and a perfect storm in the world of finance and ignore the existence of the new sails that were able not only to capture the smallest breeze but even to change the direction of the winds, is to turn a blind eye on what happened . The outlandishly bad mortgages given in the back-yards of some American cities would not have gone anywhere, and the capitals of the world would not have travelled to these back-yards either, had it not been for the “AAA No-Risk” sails hoisted up by the risk kommissars appointed by the financial regulators, namely the credit rating agencies.

Finally on “decoupling” what on earths is he talking about? The credit ratings risk assessments is what has coupled the whole financial world and these couplings, or shackles, are still in place. Q: Which was the first bank that lost out on the subprimes? A: A German bank. Q: And what have China, Russia and many other countries lost in official investments coupled to the subprimes? A: Anyone’s guess, though I have a feeling I would not like to be in their financial advisor’s shoes right now.

You’re free to go anywhere… but use my guides.

Sir in trying to place the “Credit crunch in a century context” August 8, you mention that the “financials flaws and perversions exposed by the credit crunch are on a par with 1920s” giving as an example “the moral hazard that allowed lax mortgage lending, because the risk would ultimately be sold to a third party via securitization”.

In doing so you keep on ignoring that what made it possible for the lax mortgage lending to make its way into securities for which there was a market, were the prime ratings awarded to these instruments by the credit rating agencies, the supreme risk surveyors appointed by the bank regulators.

You also conclude that “The free flow of international capital is not under threat”, but try to tell that to all those that were led over the subprime mortgage precipice by those traffic signs saying AAA No Risk. With the information on risks already concentrated in the few hands of the official guides and whose “opinions” are imposed on the markets forcefully by the regulators, it is hard to sustain the notion that freedom of flows and free markets still prevail.

A good piece on Venezuela

Having been quite critical of some of Benedict Mander’s previous reports on Venezuela let me just express that I found his “Venezuela’s televised revolution”, August 8, accurate and balanced… though I guess that Mander will be exposed to criticism from any of the extremes that crowd our airwaves, c’est la vie… I write weekly in Venezuela in green but most of my readers there can only read me in yellow or blue.

Given the inevitability of the bust we need to make more of the boom

Sir Willem Buiter in “Welcome to a world of diminished expectations” August 6, takes the role of a neutral and detached observer when he rightly acknowledges the unavoidable boom-bust cycles in the economies around the world and looks into the future for clues. That is good, but how much better would it not be if he had dared to make some recommendations on how to go about to make the most of the boom-bust cycle itself. I mean, when I have a hangover, much of the way I feel about it, has to do with whether the party was worth it or not.

At this moment we live in a world where financial regulators are only concerned with avoiding the bust, but is it not time for them to start thinking more in terms of helping to make the most out of the boom? The worst part of today’s headache with the financial system, is that the party seems not having been that good, except of course for some of the financial intermediaries who enjoyed it enormously.

Competitive financial markets and risk information cartels do not go hand in hand

As global public goods go credit ratings have certainly not proven their worth. Alan Greenspan, the former chairman of the US Federal Reserve, now has the galls to tell us “The world must repel calls to contain competitive markets” August 5, after having been absolutely silent while the credit rating agencies, empowered by the financial regulators as risk information cartels, imposed their opinions on the markets in clearly uncompetitive ways. Why do not regulators, like soldiers, just fade away?

Do not blame the sprinklers, blame the sprinkler inspectors and the smoke detectors

Sir Joseph Stiglitz in Fannies and Freddie’s free lunch July 25 holds that “No insurance industry would provide fire insurance without demanding adequate sprinklers; none would leave it to “self regulation”. But that is what we have done with the financial system.” Wrong. Insurance companies would and should provide fire insurance even if there are no sprinklers, as long as the risk premiums are right. What happened was that the financial regulators outsourced the checking of the sprinklers, and the installation of smoke detectors, to the credit rating agencies and these fouled it all up, reporting no smoke when burning and sprinklers where there were none.

Free lunches just for current homeowners?

Sir Joseph Stiglitz in Fannie’s and Freddie’s free lunch July 25 proposal of “converting the home mortgage deductions into a cashable tax credit” begs the question, and what about those who rent and those who would want to see house prices come down so as to be able to afford one on their own? The Home-Owners Church giving out free lunches only to their own destitute and ignoring all others is starting to look like pure discrimination.

It is a myth that the financial markets were freed

Sir Paul de Grauwe writes “Cherished myths have fallen victim to economic reality” July 23 and mentions as one of the fallen that the “financial markets have to be freed from the shackles of government control”. This is simply wrong. The current crisis can be directly blamed on the fact that the regulators shackled the banks and many investors to some government appointed few outsourced risk overseers, the credit rating agencies, and these later led the banks, the investors and the regulators over the subprime mortgage precipice. To make it worse, these shackles are still being fully enforced.

We all need an insurance against what they are going to think they have discovered in our DNA

Sir in “The fallacy of the ‛choice agenda’”, July 18, Sir Samuel Brittan enters briefly into asking what will happen to health insurance when DNA records come to provide detailed health prognosis. I would answer, just what happens when credit records provide detailed information to lenders, that the borrowers often get bunched together into small groups of misfortunate outcasts that have to take care of each other. For instance, among the subprime we find those who are not able to serve a loan at very high interests, and therefore lose out, and those who by being able to serve their loan de-facto evidence they deserved a lower rate, and therefore also lost, making it truly hard to distinguish a winner.

Since Brittan also correctly states that “insurance is well suited to covering events that are unpredictable at the individual level” let me say that for over a decade I have held that the most important new insurance coverage we all need is that of the risks derived from what they are going to think they have discovered in our DNA.

Could axing an anti-graft watchdog actually reduce graft?

Sir I read the report by Guy Dinmore and Michael Peel titled “Italian premier to axe anti-graft watchdog” July 18 and was of course duly upset. But then I started to think about the figures mentioned and as a yearly budget of 2.5m Euros to fight corruption in Italy seems not to be sufficient it could actually be more honest, and less corrupt, not having a watchdog at all.

It also reminded me of once when at an anti-graft conference I commented that those selling themselves as “anti-corruption experts” sometimes sounded to me as if they could themselves be involved in an extremely subtle form of corruption. I got some strange looks!

What we need to make sure is that any financial crisis results at least from something worthwhile.

Sir John Eatwell and Avinash Persaud, in “Fannie and Freddie, damned by a Faustian bargain” July 18, write the following: “The main cheerleaders for the marketisation of banking were the gnomes of Basel – the centre of international bank regulation. Many regulators thought the “marketization” of banking represented a brave new world, where grizzled, idiosyncratic lending officers were replaced with best-of-breed credit models, policed by third party rating agencies and, where risk was digitised, spread across a large number of investor and traded. But it was a Faustian bargain…. We need to redraw the lines of financial regulation. A critical objective should be to preserve diversity, not create artificial homogeneity in the blind pursuit of common practice.”

Of course as I have been writing and fighting along those lines for over a decade I totally agree with them on this. But when they suggest that regulators need to focus more on the risk capacity of the institutions, primarily their funding structure, there I lose them. The first think we need to focus on is what the real purpose of our financial system should be since currently it seems limited to avoid any type of crisis and that, besides being unrealistic, sounds like a truly pitiful objective.

Since a financial crisis is natural and will happen no matter what, we need to make sure that any financial crisis at least results from something worthwhile.

Politicians and regulators are the same… they only look out for their own interests.

Sir Erik Berglof and Raghuram Rajan in “Progress in emerging markets is being put at risk” July 18, and as a result of the current crisis that gives oxygen to populism, say that “Many of the actions against the financial sector are proposed in the name of the poor, even though the true beneficiaries are the politicians themselves. Absolutely true, but just in the same vein it can be said that most of the current bank regulations are exclusively the result of regulators only wanting to avoid a crisis on their watch, selfishly not caring a jota about the true development needs of the poor and the not so poor.

What would the founding fathers say?

Sir Sam Natapoff recounts part of the US financial history in “Finance and the Fed: the battle is not over” July 17. What I would have found really interesting though is to hear him speculate on what the founding fathers would have said about the following issues:

a. The empowerment of the credit rating agencies with the capacity to influence where the capitals should flow, as they currently do through the minimum capital requirements for the banks that are primarily based on the risk ratings.

b. Favouring the government coffers, because when a bank lends money to the government it does not have to put up any capital, something equivalent to an infinite credit multiplier, but if it instead wants to lend to a private, then the shareholders would have to put up 8 dollars or more for each 100 lent.

c. That the savings of the nation are by means of the current regulatory system strongly biased towards financing sectors that can be construed as low risk, such as mortgage lending (ha!) when compared to other more risky but perhaps more nation developing endeavours such as decent job creation or the reduction of climate change risks.

The managers of the oil extracting nations simply cannot manage more oil revenues.

Sir Martin Wolf in “A year of living dangerously for the world’s economy” July 16, quotes Daniel Gros of the Centre for European Policy studies on that oil producers (more correctly oil extractors) will leave oil in the ground if the rise in real oil prices is expected to be faster than the return on the alternative assets. Nonsense! Any private company would at current prices be selling oil like crazy to make their shareholders happy. The problem is that there are no real shareholders in many of the oil extracting countries and so even if their citizens, their equivalent of the shareholders, would love to see more oil revenues coming into their pockets, their respective governments have enough trouble managing the huge oil revenues as is.

Why should on earth should Venezuela extract more oil… if all what the government can thing of doing with it is giving it away to London?

What a splendid moment for an America Union!

Sir when reading Martin Wolf’s “A year of living dangerously for the world’s economy” July 16, and seeing him speculate that in terms of government indebtedness the US could soon look like Italy, I cannot help but thinking about what a particularly splendid moment it would be for the announcement of an American Union between the US, Canada and Central America.

Analyzing these countries you see how well they complement each other in economic terms and so the worst thing that could happen for the US now would be to build borders and shrink their GDP numerator just when the check arrives with a high debt denominator.

On averages and dark pools

Sir Rupert Macey-Dare´s suggestion to “Upgrade models to blend in pricing information” July 14, which is sort of looking at the difference between how the market prices risk and how the credit rating agencies see is intuitively attractive. That said we have to remember that an exact average does not signify a perfect average and also the fact that if the dark pools where trading occurs in a hidden way and that have been lately so much mentioned really take off then our market price data might not reflect the real market price.

By the way will there be some ownership of the data in the dark pools that will allow for their commercialization at a price? A new line of business? Dark pools of student grades which parent have to pay for to see?

Castigate the regulators

Mr Pietro Calice writes that “Sanctions and enforcement rules are needed to regulate the rating agencies”, FT July 11, but what seems most needed are sanctions and enforcement rules to regulate the regulators. How many financial regulators have been fired having been found sleeping on their job after they outsourced the watch out to the rating agencies? None? Yep!

To me there are clearly none more responsible for the current calamities than the regulators that thought up the crazy idea that it is possible to drive risks out of banking forcing the banks to heed the specific opinions of the credit rating agencies and without creating even larger systemic risk.

These regulators though they perhaps should not be sent to jail, should at least be named, shamed and fired… otherwise all talk of accountability is just a farce. If an impossible construction is contracted out who is really guilty when the construction falls?

I guess it is time for your reporter to change location

Sir I am sorry but Benedict Mander completely misses the angle when in “Red tape congests Venezuela’s roaring car trade”, July 11, he describes the governments “new rules that 30 per cent of cars sold from next April must have dual natural gas and petrol tanks” as something extraordinary. I just need to ask what extraordinary measures he believes the Crown would have to take to reign in car sales if it sold petrol at 4 cents of a dollar per litre and if it subsidized the import of new cars by means of an exchange control system.

When a foreign reporter does not see the absolute grotesque in the state giving away petrol at prices below distribution costs, I guess that reporter has been to long in the country and has become blind to its realities. There is supposedly a study that shows that people after having lived long enough close to a railway station do not even hear the trains, because of natural anatomic process of adjustment.

Just another case of managers running their personal agenda.

Sir Daniel Gros writes that “it is no mystery that oil supply has not reacted to higher prices. Producers are just waiting for even higher prices tomorrow”, “The China bubble fuelling record oil prices” July 10 and this is far from the whole truth.

The problem lies in that in the many countries where the oil belongs to the State, the current oil revenues exceed their respective governments’ capabilities to use them rationally, and their respective leaders’ most immediate personal needs, and so there is not a lot of incentives for them to produce more.

If on the other hand in all these countries, where the population still suffers many unsatisfied needs, the oil revenue was to be shared out directly to the citizens, the true shareholders, you would see more supply. Again it is all another case where the management run their personal agenda.

Gros quotes King Abdullah of Saudi Arabia that if additional oil were to be found in his country he would advise leaving it in the ground because “with the grace of God our children might have a better use of it” and this he can say only because the current children of his land have no say on it.

Give more freedom to the commercial banks

Sir of course I agree with Frank Partnoy in that we need to “Do away with rating-based rules” July 9 (my over 100 letters on the subject to FT should attest to that) but I would not necessarily stop at picking a substitute like the risk assessments made continuously by the market and as Partnoy seems to suggest, but change the whole current system of minimum capital requirements that differentiates among risks and go for flat percentage capital requirements, that could be higher or lower depending on the conditions of the economy.

That way we put the responsibility for taking the financial decision squarely back on the shoulders of the market and the individual bankers by eliminating the almighty excuse impossible to avoid of “I just followed the advice of the credit rating agencies that my bank regulators appointed”.

The traffic signs set up around the world by the credit rating agencies indicating low risks and the minimum capital requirements for the banks hijacked the commercial banks. It is high time to free them since we do indeed need their cooperation in channelling our resources to more productive uses than the building of subprime-mortgages financial pyramids.

As disaster producers, do not underestimate the humans

Sir John Kay tells us to “Forget the meltdown worry about goo and asteroids” July 9 and his arguments goes along the line that the damage humans can cause is modest relative with the damages nature can cause. On the surface it would seem that he has a point but given that humans are no cats and have only one life it does not really matter whether a disaster is capable of killing you once or a million times over.

Also he should not forget the havoc humans create while trying to tame the nature. Just look at the financial sector. Our risk-busters appointed the credit rating agencies to eliminate the risks and what did these do? They concentrated their prime-rating rays too much on a part of the market so that it exploded, bubbled, only later to implode, hopefully in a bunge, but that will foreseeable cause many sufferings, and worldwide, you can’t hide this fact, many onetime deaths.

Whatever, do not make the poor countries trust they can count on the rich ones

Sir Martin Wolf in “Why the obstacles to a deal on climate are mountainous” July 9, repeats frequent arguments of why the costs associated with the reduction of carbon emissions should be borne by high-income countries. Nothing wrong with that except if doing so makes the poor countries actually believe this is going to be so.

Since I am certain that Martin Wolf like me suspects that the possibilities of the high-income countries picking up the tab on this are almost nil, may I suggest that a more productive and honest line of argument would be on the line of the following:

“You poor countries, you better take special notice since in most of the climate change impact studies you seem to be dangerously exposed and since you most probably will not be helped sufficiently by the rest of the world community, you better stop copying the rich countries unsustainable habits, and start cracking on preparing yourself for the worst, on your own. And who knows, there might even be some great hidden benefits in doing so.”

We need a new batch of bank regulators

Sir these days the credit rating agencies are getting pounded on, as they should be, for instance as described by Joanne Chung and Michael Mackenzie in “SEC sees conflicts of interest at rating agencies” July 8, but the really frightening issue is how on earth we landed ourselves some bank regulators that trusted so much the credit rating agencies.

No matter what you believe the credit rating agencies they do not even intend to look into the future, they just extend the past into the future, and so they do not even purport their ratings to be correct, and besides that they are manned by humans and therefore bound to err.

But all that did not stopped the regulators from assigning to the credit ratings agencies the role as supreme risk overseers and by doing so reinforcing the beliefs of all those who wanted to believe that the future is manageable. And, like lemmings, the market followed the officially endorsed credit rating agencies over a precipice, and will do so over and over again. Is it not high time to get us a new batch of bank regulators, some that are more knowledgeable of the very basic facts of life?

And the lesson number one is....

Sir, Martin Wolf in “The lessons to be learnt from today’s financial crisis” July 2, 2008 quotes the Bank of International Settlements annual report stating “loans of increasingly poor quality have been made and then sold to the gullible and greedy”. Although I find it hard to think of a market that does not use greed as one of its main motors it is really the “gullible” part of it all that really blows my mind.

Who on earth is BIS to talk about gullibility. Was it not the Basel Committee on Banking Supervision that BIS hosts that set up a system based on credit risk assessments and that appointed the credit rating agencies as the supreme risk measurers? If we normal citizens and investors are gullible of anything it has been of believing that the Basel bank regulations had taken care of the problem once and for all, and that the credit rating agencies knew what they were doing.

BIS also mentions “the inherent procyclicality of the financial system” to argue for tighter monetary conditions when credit soars…but not a word about how the risk rating and the consequent “massive re-rating of risk” can send cyclicality soaring to the moon.

No, if there is a first lesson to be learnt it is that central bankers and bank regulators are, no matter how knowledgeable and pompous they act, only humans prone to err, and so it behoves us not give them too much powers, which is what makes them truly scary and dangerous.

PS. A letter on this theme to FT back in 2004.

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is dangerous nonsense.

The bank directors have the mother of all the good excuses.

Sir Francesco Guerrera and Peter Thal Larsen wrote a full pager on June 26, 2008 titled “Gone by the Board?” on why the directors of big banks failed to spot the credit risk. Though it is not my intention or role to defend bank directors I must in all honesty say that they completely left out the most important argument the directors could use in their defence.

Just think about a knowledgeable and a responsible director’s chances to convince his fellow directors that the securities backed with subprime mortgages and rated prime by the credit rating agencies and appointed to such a task by the bank regulators themselves were not prime as he had heard rumours that the mortgages were not awarded with the same usual care. None? I would say so.

If you want a board to act you have to let it act and not let them believe that the credit rating agencies are doing the job for them.

But the citizens of the oil exporting countries would love to consume…if given a chance.

Sir Martin Wolf says in “How to manage the world economy through two crises” June 25 that the ongoing transfer of wealth from oil-importing countries to oil-exporting countries… from those who spend to those inclined to save… will curb the rise of global demand” and he is right, but it should not have to be that way. The reason for him being right is that the wealth transfers goes into sovereign funds or other government pockets and not to the citizens of the oil-exporting countries who would also gladly step up their consumption.

Today, in Venezuela, I am publishing a fictitious letter from Arnold Schwarzenegger in which he offers to buy on a rolling five years average price 2 million of oil barrels per day to satisfy the needs of his constituency and take the worst volatility out of the market. To stimulate Venezuela entering into such a country he is offering to pay an equal share of the proceeds, to each one of the 26 million citizens of Venezuela, in the currency and in the individual account each one of them would like.

http://opinion.eluniversal.com/2008/06/26/opi_769_art_de-arnold-para-venez_26A1723279.shtml

Indeed moderation needs to be sustained…but it better be the right kind.

Sir Stephen Cechetti wrote “We need to sustain the great moderation”, June 23, 2008 and I initially thought he meant a “from-now-on”. To my big surprise, reading it I then saw that he refers to the period 1985 to 2005 when the $500bn in home mortgages grew to $9,500bn, signifying debts of about 7 months of the current GDP, and of which $7,500bn was used for securities, as the “moderation” that with some minor tweaking, needs to be sustained.

On what planet does he live? As I see it the most important result of that boom was to make the USA even more energy dependent, in the midts of an environmental threath, and luring many babyboomers to anticipate their current consumption.

Can you imagine how much better the US would have been off if those $9,000bn had gone to infrastructure investments that prepared the US for the new realities?

But of course that could never have happened when the bank regulators all they care about is to stop the banks from defaulting… no matter where the rest of the country ends up.

Indeed moderation needs to be sustained…but it better be the right kind.

The real conundrum is… what is the purpose of the banks?

Reading “The conundrum of financial stability” June 20 we get the impression you have been boxed up with those bank regulators for whom everything in life circles around stability, on their watch. You discuss the problem of the central banks having the dual responsibility of macroeconomic and financial stability, but forget that out there, in the real world, stability itself is not enough, we want and we need more.

How the financial systems could help to create decent jobs and avert real threats such as those from arising from climate changes, are issues much more important to discuss than just how banks can avoid to default but, unfortunately, almost by definition, central bankers are not at all interested in those themes, and much less now when having convinced us that they need independence they have been granted their own full stability, given that we cannot fire them.

Angela Merkel, helps us understand, thanks! And now credit rating agency Del Sur!

Sir the world at large needs to show Angela Merkel much gratitude for when she says “I think that in the medium term Europe will need a working ratings agency because the robust currency system of the euro has not yet secured sufficient influence over the rules governing the financial markets” June 11, she is in fact daring to lay bare the fault in the whole fundamentals for the use of the credit rating agencies, namely that these agencies could, objectively, without bias, and presumably without mistakes, measure risk.

Not so, whether through bias or through mistakes they are as humans to err and with their signalling lead us in the wrong directions or even over precipices.

I can already hear a hugo chávez call for a credit rating agency Del Sur!

But foremost we need a new direction for our growth

Sir Martin Wolf writes that “Sustaining growth is the 21st century’s big challenge” June 11 but as the article is set in the perspective of the environmental and energy limitations that the world now faces and that Jeffrey Sachs has written a book on a better title would have been “Re-direction growth so as to make it sustainable is the 21st century’s big challenge”.

Now how do you do that? First of all by measuring growth in terms that makes more sense. That a dollar used to buy the family’s third car in a developed country should count as much as the dollar used to pay for the vaccine for a child in Africa does somehow not seem to give us the right compass bearing we need.

Why can’t you have sensible long term contracts in oil?

Just the sheer possibility of losing a tenure based on no particular fault of their own, could do wonders for the educational system, infusing it with a minimum required dose of uncertainty, and thereby allowing tenured professors to at least to understand the concept of anxiety.

Sir in “Double, or quit?” June 10, you say that “Volatile prices get in the way of sensible medium-term contracts to produce or deliver oil-intensive goods and services” June 10 and you are right but why on earth you cannot extrapolate that into the need for sensible medium-term or even long term contracts for oil itself, to bring down that uncertainty that hinders more investment is indeed very hard to understand.

We need to avoid monopolies or oligopolies in the market of risk-appraisals.

Sir it is indeed comforting to read the president and chief executive of the Federal Reserve Bank of New York Timothy Geithner admit that “Regulation can distort incentives in ways that make the system less safe”; but also disappointing that in his Op-Ed “We can reduce risk in the financial system”, June 9, there is not a word about how the appointment by the regulators of the credit rating agencies as their delegated risk surveyors, reduced the incentives for the rest of the markets to do their own risk appraisals.

We need to avoid monopolies or oligopolies in the market of risk-appraisals.

Sir it is indeed comforting to read the president and chief executive of the Federal Reserve Bank of New York admit that "Regulation can distort incentives in ways that make the system less safe" but also disappointing that in his Op-Ed "We can reduce risk in the financial system" June 9 there is not a word about how the appointment by the regulators of the credit rating agencies as their delegated risk surveyors, reduced the incentives for the rest of the markets to do their own risk appraisals.