Dear World, you’ve got to be kidding!

Sir I refer to Philip Stephens “Broken banks put the state back in the driving seat” November 28 and which as a basic premise must have it that our governments were not in the driving seat. Wrong!

Our financial regulators thought themselves capable of living out their bedroom fantasies of a world with no bank crisis and thereto in Basel imposed some minimum capital requirements on the banks based on the regulator’s particular monsters, defaults, and officially empowered the credit rating agencies as the risk watchers for the world.

As a direct result we now find ourselves in the midst of a financial meltdown product of having been pointed towards the supposedly risk free swamplands where the lousily awarded mortgages to the subprime sector made their living.

And now we want to dig us further in the hole giving some government bureaucrats even more room to exercise their fantasies… Dear World, you’ve got to be kidding!

Neutralize the regulatory credit destruction

Sir in your “Credit creationism” November 28 you say “It is not clear how banks will be coerced into lending” Why do you not try by neutralizing the minimum capital requirements for the banks imposed by Basel and which mostly coerces the banks away from their normal risky bank lending into the havens that the officially appointed risk surveyors, the credit rating agencies, consider as safe?

More than bank lending it is the willingness to take risks that must be restored.

Sir holy Moses, Martin Wolf in “How Britain flirts with disaster” November 28 tells us that the global freeze that hit Iceland is on its way to Britain as the economy will shrink, the public debt increase and the ratio of it all snowball into pure unsustainability. I am no Britain expert but it would seem that Wolf has trusted the triple-As contained in previous pre-Budget reports too much. Now he might know how it feels for a banker that deposited too much trust in the credit rating agencies.

Wolf ends his article saying “Letting bank lending stay frozen is not an option. The government surely knows that. Do the bankers?” meaning by that we better start rowing all or will sink like a stone. Wolf is only partially right.

It is not so much the bank-lending per se that has to be restored, what is much more needed is the willingness of the market to take risks. In this respect, and for the umpteenth time, I submit that it is much wiser asking the governments to eliminate the risk-adverseness they introduced in the market, foremost with the minimum capital requirements for the banks designed by the Basel Committee, than to have some bureaucrats becoming the risk-takers playing with the future tax-payer’s money.

Mr. Sachs let us though avoid stabilizing underdevelopment.

Sir The introduction by the Basel Committee of the minimum capital requirements for banks and which is based on some vaguely defined risk of default only reflects, at its best, the perspectives of a developed country that has a natural desire to keep all that it has gained under the belt; and has nothing to do with the risk-taking a developing country needs in order to place at least something under its belt.

Add to the previous the empowerment of the credit rating agencies as the official guides in the world of risks, and which directed trillions of dollars in capital to the supposedly risk free land of subprime financing instead to some perhaps less risky opportunities in developing countries and we can only conclude that the title of Jeffrey D Sachs’ article, November 27, should have been “The financing of the aid to the developing countries”.

“A new system of development finance” needs to start instead with analyzing issues such as the role of risk taking in development, since risk is indeed the oxygen of development. In this respect we feel tempted to remind Mr Sachs and other that when helping, they please try to avoid stabilizing our underdevelopment and that they instead help to get rid of those Basel regulatory elements that make the living in high-risk-country even harder than it already is.

Governments would do better stopping the regulators from bullying the bankers than joining the party.

Sir John Kay hold that “A passive approach to bank stakes is inadequate” November 26. I agree but before we have our governments start using their bail-out investment’s to start bossing the banks around we should request the governments to first remove the disincentives the government has created to keep the banks from doing what they should do namely taking on productive risks.

I just wish that all of the columnists of the Financial Times took some time off to read what the minimum capital requirements created by the Basel Committee are all about. They are in fact the most important regulatory aspect that concerns our banks. You can find them in: http://www.bis.org/publ/bcbs128b.pdf

Do the bells toll and if so for whom?

Sir, Martin Wolf titles “Why fairly valued stock markets are an opportunity”, November 26, and who would argue with that? It gets much thorny though when figuring out what “fairly priced” really means and for whom the opportunities exists.

Wolf has a go at answering whether the bells really do toll by using a fundamental variable like the market value to the net assets value at replacement cost, though analyzing it mostly as a chartist looking for important inflection points. Anyone who believes or wants to believe that the market is now fairly valued will indeed find some comfort.

Now for whom does the bell toll? The young? Should they buy the shares from the baby-boomers at this level in order to build their own nest for the future or should they better wait? Not a clear call but it sure looks like it will be a horrible battle between the generations.

Should the government, given its deep pocket and the time horizon that is needed buy shares? I think better not. A government, especially when its finances are tight and it will anyhow have to bail-out many baby-boomers in the real world, should concentrate on assisting the birth of the new rather than saving the value of the old, and this even when some advisers guarantee it there are great profits to be made… when buying shares from them.

We need to diversify our portfolio of regulators.

Sir Walter Maatli and Ngaire Wood in “Who watches the watchdog?” November 24, and in reference to our current financial regulators say that “The Basel Committee is dominated by central banks. They do not represent the broad range of interests likely to be affected by bank failure. They are not politically accountable… many have a culture of discretion and secrecy, rather than of transparency and openness to public scrutiny.” This is indeed a source of problems. We cannot afford to have the regulations of our financial systems correlated exclusively to the risk-adverse brainwaves of one special brand of regulators.

But, when they suggest the use of the Financial Stability Forum (FSF) as the check-and-balance for the regulators I must alert that just widening its country representation could perhaps not suffice, since the sole fact that new members could come from different geographical areas does not guarantee any less correlation. Often the new are completely correlated with the old by means of having gone to exactly the same courses with exactly the same professors using exactly the same financial models and that rely on exactly the same financial data.

This is no classic crisis

Sir I could not agree more with Mr William Jacobson that we need to concentrate more on the real economy as opposed to the financial economy, since the first has much better possibilities of delivering fundamental positive economic change, “Restore balance to financial and real economies.” November 24. This of course does not imply that Wall Street is irrelevant to Main Street.

But when Mr Jacobson says “that the current credit crunch is the aftermath of a classic leverage-fuelled financial boom” I must disagree. There I nothing classic in a crisis caused by investors having followed officially empowered risk surveyors, the credit rating agencies, to such a swampland as the one represented by the extremely bad awarded mortgages to the subprime sector in the US. That is by all means a first, and let us pray it also becomes a last.

Don’t count on the Dr Strangeloves in Basel.

Sir Peter Montagno in “Danger of pressing nuclear button on a rating agency” November 21, holds that “a bloodbath in the markets” could happen “if and when the authorities decide to withdraw an agency’s registration”. What on earth does Mr Montagno call what is currently happening in the markets?

Instead of pinning our hope on some Dr Strangeloves in Basel figuring out how to better control the credit rating agencies we should just proceed and disarm their nuclear heads, taking away the powers of influencing so much the markets that have been vested into them by the same scientists in financial regulations.

And what about some more flexible Basel limits?

Sir Peter Thai Larsen reports that “Basel outlines stricter limits”, November 21, but that one official said “We’re not going to jack up all the minimum capital requirements in the middle of a crisis”. Phew... what a relief? Even though just talking about it cannot make the urgent task of raising new equity for the banks any easier.

But what about lowering some of the minimum capital requirements in the middle of a crisis? Especially considering that these capital requirements did not turn out too low for the risks they were supposed to cover, but ended up way too low only because the risks were lousily measured by the risk surveyors appointed by the Basel Committee.

Indeed we must not try to avert crises; we must make them more manageable

Sir Benn Steil in “We need a safe-fail approach to avert new crises”, November 20, argues for “interventions that recognize that institutional failure will continue to occur and that focus on limiting the systemic damage after they do”. He is absolutely correct and in this respect I have argued for a progressive tax on our financial institutions based on the bigger you are the bigger it will hurt us when you fall concept, which could help us to contain the size of the damages.

We need to be very aware that this crisis is turning out to be one of the worst ever just because our regulators in their sincere but silly efforts to avert a crisis, introduced some minimum capital requirements for banks based on what they wished to understand as risks and empowered the credit rating agencies as their global risk surveyors. These man-made artificialities created and leveraged some awful systemic risks.

Of course, like Benn Steil mentions, we also need some basic operative “fail-save” solutions, like adequate clearing houses that can safely assure us that our expected small net exposures are not turned into irreconcilable monsters.

Get the banks going instead of having them crying over spilled milk.

Sir Glenn Hubbard in “Ways for Obama to energise the economy”, November 20, when mentioning the need to recapitalize our banks so that normal lending returns, leaves out one of the most important adjustments the bank regulators could do. Why does a bank that raised equity according to the minimum capital requirements now have to use extremely scarce new equity to replenish its equity to compensate for the discoveries and down-ratings? This is like crying over spilled milk, when we would all be better off if they used all fresh equity to sustain new business, which is the only business capable of lifting us out from the hole we’re in? For any fresh capital injections, from governments or other sources, the banks should be allowed, if they so wished, to adopt a uniform equity requirement, for instance 6% across the board, lower than the standard 8% target set by Basel, at least for the time being. It is indeed important to stretch out a hand to help those down but it is much more important to provide the support to those going up. And with respect of that helping hand, let us be absolutely clear that the best way of solving the mess with all the lousy outstanding mortgages, for all the parties, is to make sure these mortgages become worthy of the prime ratings they were initially wrongly awarded. If they keep on being subprime they will be so much more expensive for everyone to carry.

We might need an international regulator, but we humans do not have the people for that.

Sir Carmen Reinhart and Kenneth Rogoff declare that “We need an international regulator”, November 19. Their fundamental reason for it is that “finding ways to insulate financial regulators from political meddling is critical to creating a more robust global financial system in the future.” I vehemently disagree.

The current crisis is a direct result of the financial regulators having insulating themselves in the Basel Committee, the Financial Stability Forum and the Central Banker’s club house, the International Monetary Fund, where they in splendid isolation among friends concocted ideas like the minimum capital requirements for banks based on vaguely defined risks, and empowered the credit rating agencies to serve as the guiding stars for the capitals of the world. What more political independency could they have wished for? When were the financial regulators stopped by the politicians from stopping this crisis?

Someone recently reminded me that F.A. Hayek wrote that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design", and which tells us that even if we could have much need for an international regulator, we humans simply do not possess the people capable of being international regulators; and ignoring this would only set us up to much worse systemic risks.

Contrary to what Carmen Reinhart and Kenneth Rogoff say I would welcome some more political meddling in our current bank regulations so as to ascertain that our financial system, or at least our commercial banks, have a worthier purpose than not falling into default, which is the only thing that our regulators worry about. What about banks risking it more to provide us with decent jobs… instead of playing it safe using the AAA ratings the regulators instructed them to use?

Please, do not dig us deeper into the sophistications of risk management!

Sir Michel Schrage in “How to sharpen banks´ corporate governance” November 18, tells us “that the most important governance reform in financial services would make risk management the explicit duty of the board.” “insisting that directors be more conversant in and accountable for risk.”

As someone who knows quite a bit about risk management and that also, while an Executive Director served on the audit committee of the World Bank, drowning in Sarbanes Oxley procedures, I feel this is a very dangerous approach that could lead to an over-specialization of the boards which would, sooner or later, end up with some extremely sophisticated blinds leading some quite expert blinds.

No, what we need is a much diversified board of directors, where before any approval all directors have to certify, in writing, that they fully understand what they approve. What cannot fully be understood, by reasonably intelligent Directors, without a PhD in financial risk management, has absolutely no place in any financial institution that has the benefit of a public lender of last resort.

This is especially so because financial studies of financial risk management does not guarantee knowing about all the risks of life in general, such as the possibility of credit rating agencies suddenly not knowing what they are up to and sending us, the herd, away into crazy directions.

And with respect to the “too big to fail” the solution is simple. A tax on size, because the bigger they are the more it will hurt when they fall on us, as they will, sooner or later.

If it is not a job for the market it is still less a job for the government!

Michael Skapinker in “Every fool knows it is a job for the government” November 18 seems quite willing to let the pendulum on financial regulations to go back completely based on a “Fool me once, shame on you; fool me twice, shame on me”.

Skapinker would do well remembering that no matter how much talk of de-regulation there is we got here primarily because the financial regulators in Basel concocted what the thought was a magical potion capable to eliminate the risks in banking for ever, the minimum capital requirements for banks based on vaguely defined risks of default, and then empowered the credit agencies to serve as the Masters of the Risk in the world. Without that, we would be where we are.

And please, do not argue that the same thing happened with the dotcom bust. There investors were pursuing profits in an always risky stock market while this crisis happened because investors followed what was supposed to be AAA least risky securities, and which by the way pokes fun at the whole concept of allocating risks with those better able to manage it.

And so, before we start swinging, let us make sure where the pendulum really is. Perhaps it is because I have never minded government regulations, when clearly needed, that I find it much easier not sending the government where it is not needed. Long live the radical middle!

Are we to see us all as public servants?

Sir, having protested for years the artificial risk-adverseness that the Basel regulations introduce in our financial sector, by means of the minimum capital requirements for banks, I cannot but agree fully with Mr Andrew Hope in that “Basel II has become an obstacle to trade flows” November 18.

Authorities are currently trying to stimulate the banks to give credits to Main Street, the small businesses but, in times of severe shortages of bank capital, they insist on keeping in force requirements that instruct a bank that wishes to give a loan to a corporation that is rated from AAA to AA- to set aside 1.6 units of capital for each 100 invested; but for an A+ to A- rated they need 4 units; if BBB+ to BB-, 8 units; and below BB-, 12 units of capital.

Imagine being a BB- corporation talking to a bank that needs to set aside 12 units of capital in order to lend you 100. When compared to an AAA corporation, can you imagine how much more you have to pay in interests only to make up for the costs derived from regulations? And then the bank also needs to charge you their real net risk premium.

We need our regulators to urgently understand that risk is the oxygen for any development, and for any recovery, in the same way they need to understand that just saving jobs won’t get us anywhere, when what we really need is to create millions of decent new jobs.

Do regulators really think there is a future for all of us as government employees? Is it therefore that from a bank investing in any sovereign claim with a rating of AAA to AA- they only require… zero capital?

On Companies International, November 17

Whistling in the dark forest?

Sir Robert Anderson and Christopher Mason in reporting that “Newspapers face fresh pricing pressures” they quote a spokesman for Norske Skog (Norway’s forest), the worlds second largest newsprint producer saying “We see a momentum now for increased prices”. Surprising. Is that how one whistles in a dark forest?

82 percent of pirates?

Sir Kathrin Hille and Mure Dickie reporting on how “Chinese consumers flex their muscles in Microsoft piracy flight” they mention that according to Business Software Alliance China’s piracy rates are 82 per cent, and not the world’s worst. Can we really talk of piracy when 82 per cent of a country does it? Neverland? What do we call the other 18 per cent, law abiding Chinese? When might it be better for Microsoft to go underground and start to cater to the pirates? Has Microsoft analyzed what would happen to their worldwide income if they priced their Microsoft Office at $ 9.99 per year?

Whistling in the dark desert?

Sir Simeon Kerr and Robin Wigglesworth report on “UBS fund in $500 Mideast joint foray” November 17. Steve Jacobs of UBS tell them “clients had already expressed an interest in the Middle East, which is expected to outperform most other regions as the global slowdown deepens”. Surprising. Is that how one whistles in a dark desert?

Who gets the money?

Sir Jonathan Soble, (in Tokyo?) reports on an “astronomical fine” of $1.75bn levied on some glassmakers, because they “conspired to fix prices of windscreens and other automotive glass between 1998 and 2003.” Who gets the money?

Why the British may be more careful falling in love with the euro.

Sir Wolfgang Münchau in “Why the British may decide to love the euro” November 17, makes some curious assumptions, first and foremost placing an equal sign between the dollar and the euro. The dollar is the currency of an already established country, with already established rules in how to handle the printing machines when in a crisis while Europe, whether we like it or not, is still a work in progress with little design on how to go about and print out Euros in order to fund European bail-outs.

Of course, a more accepted and wider used currency should in normal circumstances “offer more protection from speculative attack” than “a free floating offshore currency unit” (what a belittling way of referring to the historic pound sterling) but the fact is that current circumstances have very little to do with speculation and much to do with harsh realities.

Since Münchau in this context also brings up Iceland perhaps he could explain to us how much better off Iceland would have been had they used Euros instead of their Krona. As I see it Iceland would just have been able to run up quite a bit more leveraged debt, before all hell broke lose. Is that good?

At this junction one Pound Sterling gives a claim on a weakened but defined England while one Euro places a not completely defined claim on a not completely political Germany-and-Italy averaged Europe; and which of them might look stronger to the markets down the line, is yet to be seen.

And good luck to them!

Sir Ms Gail Easterbrook in his letter “Act locally to embed the right attitude to risk” November 17 when referring to giving new regulatory powers to IMF to provide “early warning” of risk to the global economy summarizes it adequately with an “And good luck to them.”

The case for more humility and lower expectations with respect “early warnings” is laid out with crude clarity by the United States General Accounting Office (GAO) in its study of the IMF’s capacity to predict crisis, published in June 2003 (SecM2003-03-734). In it, GAO states, among other things, that of 134 recessions occurring between 1991 and 2001, IMF was able to forecast correctly only 11 percent of them, and that it was similarly bad in forecasting current accounts results. Moreover, when using their Early Warning Systems Models (EWS), in 80 percent of the cases where a crisis over the next 24 months was predicted by IMF no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.

Ms Gail Eastebrook also receives my warmest nod of approval when reminding us that we need to embrace risks and that “without risks there are no rewards”. This is something our financial regulators should have thought upon before they so arrogantly decided to drive risks out of banking, with their minimum capital requirements for banks based on a vague concept of risks of defaults, and that, because it also led the regulators to empower the credit rating agencies, created the current crisis when these lousy pipers led us into the swampland of badly awarded mortgages to the subprime sector.

On carbon, please disclose something useful.

James Murdoch asks that “Carbon disclosure should be mandatory by 2010”, November 17. He is right though we must avoid becoming a now-we-disclosed-it-and-that’s-all-folks society… like in a now-we-provided a credit-rating-and-that’s-it-in-financial-regulations. The most singe important aspect with the disclosure of any information is that it is understandable, for any non-expert, and we also do not need more of the type of information that reveals for instance that, supposedly, hopefully, a quart of bottled water contains 0 calories.

In this respect instead of telling us how many units of carbon something generates it would be better to indicate what % of average daily emission of carbon is produced by a particular product or activity so as to allow us, in our daily life, to get a feel for whether we are making things better or worse. How many miles of average car driving does eating a standard Filet Mignon represent?

Another information that could come in handy, and which by the way does not require anything more than the gentle nod of an editor, is to publish, monthly, the list of the most and least per capita carbon emitters in the world, and on how they are evolving.

Tear down the walls of that club of mutual admiration... even if it takes a civil war!

Sir Alan Beattie in “Good question, Ma’am. But some people did see it coming” November 15, does not explain why those people were not listened to. The truth of it all was that the whole issue of bank regulations, the numero uno of financial regulations, was captured by a club of likewise thinkers coming from likewise life experiences with likewise PhDs from likewise universities and that all teamed up in a cosy small club of mutual admiration where no questions were asked out of politeness or just because they were none.

When Beattie now asks us “Let’s just try and get through this one without a civil war, shall we?” I totally disagree. It behoves us all to break down the walls of that club and let other mind-frames into the world of financial regulations, even if it takes a civil war. And with this I mean real other minds and not some same other-minds just because they come from different geographical areas.

Ma’am. Please be careful with Alan Beattie says. He might be one of the silencers. Who knows? They are all around us!

Some questions to the Masters of the Risks

Sir to anyone like Mario Draghi who in “A vision of a more resilient global economy”, November 14, seems to believe that making the credit rating agencies better at what they do would take care of their part of the problem, I would ask the following questions. 

What could be riskier, a credit about which an “expert” holds to be low-risk, which could lead banks to lower their guard, or a credit that because it has been perceived as being high-risk will probably be more carefully analyzed?

Could that not point to higher capital requirements for low risk credits and lower capital for higher risk, just the opposite of what the minimum capital requirements for banks now order? Is there not a big risk that the market instead of measuring the risks directly begins to measure the risks of a change of opinion of the risk setters? Do we then need agents to rate the credit rating agencies? And so on? 

Why do you think that solely by measuring the risk of default, without taking into account anything with respect to what could be the purpose of the credit, that this would put the world on a better track? Instead of having few credit rating agencies doing the job for the banks is it not better to give many banks full responsibility over their decisions?

Who ever told you that you had it in yourselves to be the Masters of the Risks? Who elected you?

Remember the bottom billion will also afford less a Zimbabwe

Sir Bob Geldof, in all honesty believes that the current crisis is the result of a runaway laisser faire fundamentalism and he is wrong. There is no laisser faire in having some bank regulators decide on their own upon some minimal capital requirements for banks based on a vague concept of risk and which places a regulatory de-facto tax on risk taking. Neither is there any laisser faire in the empowerment of some few credit rating agencies to act like the world guides on matters of risks, and which has made of them the largest propagators of the subprime virus. This though does not take away one iota from the correctness of many of Geldof’s proposals in “Remember the bottom in our brave new world” November 14, especially since most of what he argues was just as valid before this crisis.

Now unfortunately the reality of the crisis is such that even if the needs for help will increase the availability of resources and the willingness to help will decrease and that, whether you like it or not, will also require diminishing the laisser faire attitude implied in “allowing governments to determine their own agenda”. I have always fought for the right of countries to have their own unencumbered voice but the underlying assumption is of course that the quid pro quo is a more responsible behaviour. In this respect, a continent, like for instance Africa, needs now to be much more forceful in handling their Zimbabwe, if it wants to maintain its credibility.

Whatever, don’t forget the tax bill will be in the mail, quite soon.

A thirty year mortgage of 300.000 dollars at 11 percent rate to the subprime sector will, if made part of a security that because it has a prime rating is discounted at 6 percent, be worth 510.000 dollars. The difference of 210.000 dollars in financial air, pocketed as profit by an intermediary, will most probably be lost completely, no matter what happens to the housing sector. And so, if by any chance these are the kind of loses the governments are helping out with, they will not recover a single cent from it, and the taxpayer will have to make up for it, or it all breaks down in more inflation or in, gulp! … sovereign defaults.

This is why I agree and commend FT on starting to beat the drums on “Austerity must follow a stimulus”. November 13. Let us hope now that the G20 meetings do not take the form of an electoral campaign where only fiscal stimulus and tax rebates are offered and no one even speaks about the tax bill that must follow.

If it would not be for its very tragic implication it would be outright comic to see so many neo-Reaganites preaching the benediction of the Laffer curve, promising less taxes and more fiscal income… and even bail-out profits. What an amazing irresponsibility!

Do you allow Mr. Trichet to get away with it?

Sir if a president of the European Central Bank can now get away with blaming the investors for the crisis as “they put full faith in the ability of rating agencies to draw up risk assessments” like Jean-Claude Trichet does in “Macroeconomic policy is essential to stability” November 13, then Europe has a bigger problem than what I thought possible.

Either Mr. Trichet is shamelessly ignoring the role of the central bankers and the bank regulators, thru the Basel Committee, played in empowering the credit rating agencies; by naming these to have their ratings decide how much capital the banks should have, or, if he does not know that, so much the worse. At least Greenspan admitted some responsibility.

Central Bankers and regulators themselves trusted the credit rating agencies too much as their sentries for the risk-watch, while they went to sleep. To have one of the recently awakened sleeping beauties advice us on what has to be corrected, seems a bit dangerous, to say the least.

At least listen to the Joker before giving more powers to the schemers

Sir, Richard Thaler and Cass Sunstein in “Human frailty caused this crisis”, November 12, hold that “regulators need to help people manage complexity and temptations” but ignore the frailty of the regulators and the dangers of all their regulatory temptations.

I can hear now the free market answering a confounded citizen by describing the bank regulators with the same words the Joker used in the movie The Dark Knight, 2008. “You know, they're schemers. Schemers trying to control their worlds. I'm not a schemer. I try to show the schemers how pathetic their attempts to control things really are. So, when I say that … was nothing personal, you know that I'm telling the truth. It's the schemers that put you where you are. I just did what I do best. I took your little plan and I turned it on itself. Look what I did to this city with a few…” collateralized debt obligations.

When I think of a small group of bureaucratic finance nerds in Basel thinking themselves capable of exorcizing risks out of banking, for ever, by cooking up a formula of minimum capital requirements for banks based on some vaguely defined risks of default; and thereafter creating a risk information oligopoly by empowering the credit rating agencies and which was all doomed, sooner or later, to guide the world over a precipice of systemic risks; like what happened with the lousily awarded mortgages to the subprime sector, I cannot but feel deep concern when I hear about giving even more advanced powers to the schemers.

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

The US tax system needs better working progressivism.

Sir I could not agree more with Martin Wolf when in “How Obama should face his vast economic challenges” November 12, he mentions “taxation of energy”. That should be as they say in the US a “slam dunk” though let us remember that even an Al Gore, a Nobel Prize winner because of is environmental friendliness, does not dare to mention such tax in the land of the cars.

What I do not agree with though is when Wolf recommends a regressive “national value added tax rather than to rely so heavily on the income tax” as I believe that the US has to create some better working progressivism in their tax system since the very hard times fiscal ahead requires massive doses of legitimacy. Do not forget that the US dollars should actually say “In God… and in the American taxpayer we trust”

Let us also think about the world we want to emerge from this crisis.

Sir your “Spending wisely to escape recession” November 7 though quite correct on its own merits unfortunately ignores that our real challenge is not just to recover from the current crisis but to make certain that the world that emerges from it is sustainable, something its previous route was not.

For instance, in any emerging world we all know there would be little room for energy consuming climate changing vehicles and so what are we going to do about that? Therefore, should we help car producers to keep up their current production, or should we invest the money more wisely in getting them to do some serious environmental and energy friendly retooling?

Reviving the economy just to see oil go over 200 dollars per barrel does really not seem the smartest thing to do, for anyone, including the oil extractors.

How to start putting the socks back on the market

Sir, the current crisis did not arise because the market took speculative positions in Argentinean railroad bonds, it resulted from having followed whom it had been informed by their regulatory agencies were the utmost experts on risk, the credit rating agencies, into one of the least risky countries, the United States, and into a very well known market, housing finance. No wonder the crisis has scared the socks off of the market. There is nothing so scary like not understanding what has happened, and though it is nice to see so much being done to help out, it is equally scary not seeing any real efforts to avoid repeating the mistakes.

Therefore “politics and policies” and “a decline in commodity prices” could indeed be helpful to “prevent a downturn becoming a depression” as Chris Giles, Krishna Guha and Ralph Atkins discuss in “Can we go up again? The world economy”, November 6, but if full confidence is not re-established, fast, it will most probably not suffice.

How can we put the sock back on the market then? First and foremost by having the regulators guarantee they will do their utmost that never again so many will follow so much the opinions of so few. In this respect, the bank regulators, after a proper mea culpa, should announce their intention to swiftly move from a system of minimum capital requirements based on vaguely defined risks and that has induced some dangerous regulatory arbitrage, and to immediately stop imposing the opinions of the credit rating agencies on the banks and, as a result, on the markets.

Is this crisis the beginning of a clash between generations?

Just this morning walking around the park on the farm where my mother lives in Sweden I stood on top of a cliff that is rumoured to be an “ättestupa”, one of those places where Swedes of ages ago were rumoured to have thrown themselves out when they felt they had become a burden for their children. I have always doubted this particular cliff as its relative low height has seemed more inclined to cause a broken foot, only aggravating the burden.

George Magnus writes the “Recession will compound looming issue of rapid ageing” November 6, and though he does have many valid points these are all from the perspective of those on the way out. In this respect we also must acknowledge the needs of those on the way in. This crisis might in fact just be the beginning of a clash between generations.

If you are a prosperous baby-boomer with plenty of assets, then you are indeed interested in keeping the prices of shares and housing growing, and, if just a baby-boomer, to keep your job. On the other hand if you are a young with nothing but future ahead of you, you would not mind seeing the lower prices that could allow you to acquire shares or your house at a reasonable price, or to have the elderly move over so as to get a decent job. I mean, who would like to start building a nest egg for the future with the Dow Jones over 14.000?

If it isn’t totally broke, don’t tinker with it too much.

Sir Martin Wolf argues many reasons for “Why agreeing a new Bretton Woods is vital” November 4, but, given that one of the fundamental pillars of our whole financial system, namely the market’s confidence in the dollar, is in fairly good shape, if only perhaps because of lack of confidence in anything else, we should at least be very careful not to tinker too much with something that might not be that broken.

Of course there are some precautionary or corrective measures. Among these and in reference to when Wolf says “Keynes would be horrified that the world has let the genie of free capital flows out of the bottle” I have always considered that slowing down somewhat the capital movements around the world, with some type of there’s-no-need- to-so-much-rush-tax, would help us to avoid some of the stampedes and therefore benefit us all, in a systemic way.

We also should not forget that besides the financial system there are some other very serious unresolved issues that limit our current growth possibilities, like the environment and energy. Had for instance some emerging countries not accumulated reserves, and invested them in US public debt, and pushed instead their on the margin much more energy intensive domestic growth, we would perhaps have seen oil well over 200 dollar per barrel. In this respect, more than a new Bretton Wood, we need to decrease the consumption of oil in the developed countries, so as to open up the growth possibilities for the developing world that do not destabilize the whole world.

As to the huge foreign currency reserves of emerging countries let us not forget that the real danger with them is not so much their size but that they are controlled by so few government officials. Had these reserves belonged to many millions of citizens instead, it would then have been called capital flights, and they would have been pursued without clemency.

And then of course one of the most vital what to do’s, is to get to the bottom to why the world was not able to react when it knew or should easily have known, that things were heading in the wrong directions. In other words… where were Martin Wolf’s many influential economists when they were sorely needed?

Governments, whatever, do no more harm... you’ve done quite enough as is!

Sir in “Finding a way out of the global crisis”, November 2, you hold that “With goodwill and imagination, the G20 leaders can commit themselves to a co-ordinated, co-operative solution to the financial crisis” when they now meet in Washington on November 15.

As someone convinced that the seed of our current systemic financial crisis lies in the bank regulations that emanated from the risk-adverseness extremists sitting in The Basel Committee, I cannot but feel apprehension when thinking about the possibility of governments, once again, unleashing their good-willed imagination on the market.

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?