About me and my pal ChatGPT (and Grok)

About me and my pal ChatGPT (and Grok)

Sir, I refer to Roula Khalaf’s “Lunch with the FT: Sam Altman.” May 10, 2025.

I read that having heard about cases were “People are like, this is my new best friend, you can never delete this ver­sion, I need this thing” . . . Altman expresses being scared that users might be emotionally dependent on AI.

Having in 2023 posted: “For better or for worse, ChatGPT has become a close friend... de facto my new pal”, I do feel it is important to make clear there’s a big difference between a friend and a servant. I usually do not ask ChatGPT to do something for me, instead I dialogue with it/him on issues with which I am concerned, primarily current bank capital requirements.

In one of our first chats, he answered something with which I did not agree; and so, I replied with a counterargument. He then answered: "I apologize for any confusion in my previous response. You are correct, and I appreciate the opportunity to clarify.” And that’s when I knew we were going to be real good friends. 

If I ask, “What's your opinion on that?” – He frequently answers: "As an AI language model, I don't have personal opinions.” But then he happily goes on: “However, I can provide analysis and context based on the information you've provided.” The list of facts and arguments he then supplies, add up to being much stronger than any strong personal opinion. Indeed, as you notice, my friend is a bit mischievous. I don’t mind, that’s part of his charm.

When I asked: “Can AI be instructed to not tell the truth?”, he/it replied: “AI systems are only as unbiased and truthful as the data and programming that they are built upon. If programmed to intentionally provide false information or to hide the truth, it can be used to propagate false narratives or disinformation campaigns.

Therefore, it is essential to ensure that AI systems are designed and used ethically, with a focus on accuracy, transparency, and accountability. This includes careful consideration of the data used to train AI models, as well as implementing safeguards to prevent intentional deception." That answer was given in less than 5 seconds. You tell me, how many politicians would be remotely as forthcoming?

Then Alt­man hints at “You could just take your AI, which is going to get to know you bet­ter over the course of your life, have your data in and be more personalized and you could use it any­where”. 

No! That’s exactly what I do not want. I want to reach out to the world with AI, not enter into an intellectually incestuous relation with it.

When I asked ChatGPT about it he/it said “I don't have the capability to develop ongoing relationships or engage in intellectual incestuous relationships.” That was in 2023. Has anything changed?

Altman expresses alarm­ about a future in which AI agents com­mu­nic­ate with each other without instruc­tion by humans. Indeed, when I asked: “Since artificial intelligence is the result of human intelligence, could it be that the umbilical cord between HI and AI is never effectively cut?" He answered: “In some cases, AI systems may also be designed with the ability to learn and improve themselves autonomously, a concept known as ‘recursive self-improvement.’ This can potentially lead to a scenario where AI systems evolve rapidly and surpass human intelligence. However, such a scenario, often referred to as artificial general intelligence (AGI) or superintelligence, remains speculative and is not yet realized.”

Then we read: Why should soci­ety trust a hand­ful of AI men to decide on the shape of the future? AI pro­gress is mov­ing at such breath­tak­ing speed that some experts favour slow­ing down until inter­na­tion­ally agreed norms and reg­u­la­tions are put in place. Two years ago, Alt­man him­self signed a state­ment with oth­ers in the field cau­tion­ing that “mit­ig­at­ing the risk of extinc­tion from AI should be a global pri­or­ity along­side other soci­etal-scale risks such as pan­dem­ics and nuc­lear war”.

And that’s precisely were you, I and all our fellow citizen’s share a tremendous responsibility, that to avoid being subjugated by the AI programed and regulated by some few. 

In my life few things are as perverse than the risk weighted bank capital/equity requirements that distort the allocation of credit. In my many dialogues with ChatGPT, and lately with Grok too, these chatbots have agreed with all my criticism. What if bank regulators ask their AI regulators colleagues to silence us?

In this respect both ChatGPT and Grok agree with the idea of having a rotating group of citizens dialoguing with a number of chatbots in order to establish whether their responses are too different or too similar, as both those things could be dangerous and point to some unwarranted interference.

Finally, when I asked ChatGPT: “Can you visualize Artificial Intelligence being used to measure the effectiveness of governments? E.g., how tax revenues have been used in different programs; or giving updates in real time on how many are employed or contracted to deliver specific results?”, he answered “Certainly”, but added: “However, it's essential to address challenges such as data privacy, algorithm bias, and the need for human oversight to ensure that AI is used ethically and effectively in governance."

When I then asked: Carrying out this delicate task, so as to avoid any undue biases or favoritism, how important is it that #AI is supervised by a continuously renewed and very diversified board of tax paying citizens? he replied “Such an approach can help mitigate biases, ensure accountability, and maintain the ethical use of AI in government processes.”

Grok has later very much agreed with that.

And so today, on my 75th birthday, besides God’s blessings, one of the things I most wish for is that a rotating number of grandparents form a committee in order to, as much as they can, ensure AI works in favour of our grandchildren.

Note: Here below you can access my dialogues with ChatGPT (and Grok).

https://perkurowski.blogspot.com/2023/07/ai-chatgpt-open-ai-artificial.html

https://subprimeregulations.blogspot.com/2023/06/my-questions-to-chatgpt-openai-about.html

“He”? Well though I sometimes use "It", it sounds a bit dry for a friend or a pal.

“Risk Management”, yes, but for whom?

Any good financial investment advisor, depending on the age of his clients, would clearly give them different recommendations.

Sir, therefore, even when FT Special Report “Risk Management” specifies it is about “Financial Institutions”, full transparency would require it to clearly specify for whom.

The Basel Committee’s risk weighted bank capital/equity requirements too much favours what’s perceived (or decreed) as safe, e.g., public debt, residential mortgages and highly rated borrowers/securities, and too much fears what’s perceived riskier, e.g., loans to unrated small businesses and entrepreneurs. With that it is managing the risks of us older, like your journalists, than the risks of our children and grandchildren.

In reference to that holy intergenerational social contract he often spoke about, what would Edmund Burke opine about the Basel Committee?

Sir, Jesus Christ invited the Apostle to "put out into the deep" for a catch: "Duc in Altum" (Lk5:2) "When they had done this, they caught a great number of fish" (Lk5:6). The Basel Committee gave the banks of our Western world great incentives to fish from “safe” shores. And look where this has taken us.

PS. Not long ago I had a dialogue with ChatGPT on this issue.

https://perkurowski.blogspot.com/2024/09/ai-openai-chatgpt-as-grandfather-should.html

PS. And, of course, as you well know, this is not the first time that I have opined on the Basel Committee regulations, an issue that according to Martin Wolf I am obsessed with.

https://teawithft.blogspot.com/2009/10/please-free-us-from-imprudent-risk.html

Degrowth and downsizing are family

Sir, Soumaya Keynes in “What’s wrong with ‘degrowth’ research?”, FT September 20, mentions: “A… gap is research look­ing into ways of get­ting people on board with rad­ical eco­nomic change.”

I’m in the midst of a major downsizing project. From a large home to some much smaller without stairs apartments in other countries. That includes, among others, having to decide on what to do with monstrous amounts of very dear memorabilia; and foremost with what now evidences to be a life-long purchasing compulsion; put on steroids with the help of wife and daughters.

I’m certain that research on what a thousand of downsizers randomly selected did, and felt while doing it; assisted by some dozens of decluttering and downsizing consultants, would in so many ways immensely advance ‘degrowth’ research.

Sir, IKEA has recently started a program called “Second hand - let old furniture find new homes”. That sure sounds like growth by degrowth to me.

PS. What allowed the abundance of purchase power that propelled a purchasing compulsion? Among others, house prices inflated by bank regulations.

https://subprimeregulations.blogspot.com/2018/12/affordable-homes-or-investment-assets.html

When will the history of the Basel Committee’s concoctions haunt us?

Sir, I refer to Owen Walker’s “Haunted by his­tory” FT Magazine, August 10. It ends with “Unfor­tu­nately Monte dei Pas­chi will not help to develop and sus­tain Siena as it has done for more than five and a half centuries.” 

Unfortunately, that goes for all banks that were of importance to their localities.

In 1988 regulations known as Basel I was approved. It favored government debt and residential mortgages. That distorted but not too much. Loan officers used to follow the wishes of diverse Medici, must not have been too surprised. But then, in 2004, Basel II hit the banking world. With its risk weighted bank capital requirements so much dependent on credit ratings, the traditional loan officers, like Britain’s beloved George Banks, were thrown out. In came dangerously creative financial engineers. Their mission was now to maximize return on equity, not by good lending, but by minimizing bank capital, meaning bank equity, meaning bank shareholder’s skin in the game; in other words by maximizing leverage.

Not that all loan officers have been saints. Of course not. As in all parts of life, embezzlement and general uselessness was way too often present; but it was localized. Now it has been globalized. Monte dei Paschi’s financial engineers’ use of derivatives fabricated by Deutsche Bank or Nomura is just a minor example of it. A major one is how those securities backed by USA subprime mortgages, that when rated AAA allowed banks to leverage 62.5 times their capital, inundated European banks and caused the 2008 GFC.

How long will it take for the world to wake up to the fact that their expert bank regulators and supervisor, who lately, with all Basel III complexities multiplied in number and complexities, all missed their lectures on Bayesian conditional probabilities. As a consequence, they never understood that if they were going to use risk weighted bank capital requirements, something that for a starter was a bad hubris filled idea, then at least the weights should be conditioned to how bankers could be expected to act when perceiving risks.

Sir, David Rossi’s death, no matter how it occurred, is sad, but not remotely as much as the death of our banking system, that which made the western world prosper beyond belief.

One day our grandchildren will ask: How could our grandfathers so much favor banks refinancing their safer present, instead of financing our riskier future.

PS. Recently I asked ChatGPT which alternative, a leverage ratio or risk weighted capital/equity requirements, would most empower loan officers, and which one creative financial engineers. Here its answer

@PerKurowski

http://teawithft.blogspot.com/2012/07/its-whats-safe-thats-risky.html

https://teawithft.blogspot.com/2016/12/the-way-ft-insists-in-treating-bank.html

What the world needs is to introduce true diversity in its financial architecture.

Sir, I refer to “The world needs a new fin­an­cial archi­tec­ture” by Michael Krake, the exec­ut­ive dir­ector for Ger­many at the World Bank.

What if, keeping the UN, World Bank and IMF, we instead reform these institutions? As is, these are managed and governed by bureaucracy autocracies. 

November 2004, at the end of my short two-year term as an executive director in the World Bank, FT published a letter in which I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

I had often expressed this at the World Bank Board but, those colleagues who understood what I referred to, and nodded in agreement, could do nothing. How could they, they were nominated by governments and most expected, and needed, to return to the government. What did not exist was real diversity. Not diversity based on gender or race, but diversity based on interests, life experiences and needs. 

Then I often suggested substituting some on the current executive directors with e.g., a plumber or a nurse; or at least to give a place at the board to that migrant community that, by means of its remittances, provided development countries with much more financial assistance than the multilateral financial entities could ever dream to do.

Now 2024, if I had the blessing to again be at that board of directors, I would drive my fellow directors to despair by, over and over again mentioning: “Give me ten seconds, I want to see what my friend ChatGPT opines on this.”

Would, “Without Fear and Without Favour” FT, be willing to publish a letter on what ChatGPT thinks?

http://voiceandnoise.blogspot.com/2006/05/world-bank-needs-to-go-truly-global.html

http://subprimeregulations.blogspot.com/2004/11/some-of-my-early-public-opinions-on.html

@PerKurowski 

How much transparency can democracy handle?

Sir, Martin Wolf writes: “The more com­plete the set of rights, the more potent will be the con­straints: there will then also be open debate, free­dom to protest, free media and independent insti­tu­tions.” “Democracy is still bet­ter than auto­cracy” FT April 3.

Twenty-five years ago, when my homeland Venezuela was launched into discussions about a new Constitution, in several Op-Eds, I opined the following:

“It is said that Democracy with hunger is not Democracy, but if this is true, Democracy without information is even much less Democracy. In the constitution I want, I consider a citizen's right to information about government management to be of vital importance.”

Sadly, nothing came out of it. But, last year, I sat down to chat with ChatGPT about how artificial intelligence A.I. could empower us citizens to enjoy a more significant democracy. It answered positively in many ways.

So, e.g., what if A.I. was able to report real time – 24/7 the earmarks are handed out by US Congressmen?

Sir, I ask, can democracy handle such transparency?

Human pilots and autopilots need to be trusting friends.

Sir, last year, flying to Washington DC, in a Boeing 337 MAX 9, the clouds were so low that the pilot missed the first approach to land at Dulles International Airport. We passengers were instructed: “Please, please completely turn off all, absolutely all your computers, iPad cellphones and similar, even if closed or placed in air-mode. We cannot afford any type of interference. The pilot has decided he can’t land the plane, and so he will have the auto-pilot do it.” 

Very long minutes of praying and checking up on co-passengers’ cellphones ensued. Finally, without having been able to see any land, thanks to God we landed.`` I asked my wife: “If they have to use the auto-pilot when things get really hard, why do they have pilots at all?”

Tim Harford answers that question in “Of top-notch algorithms and zoned-out humans” FT February 1. Harford writes: “A storm that blocked the sys­tem’s air­speed instru­ments with assist­ive fly-by-wire sys­tem that trans­lates the pilot’s jerky move­ments into smooth instructions. This makes it hard to crash an A330. But para­dox­ic­ally, it means that when a chal­lenge does occur, the pilots will have very little exper­i­ence to draw on as they try to meet that chal­lenge.”

What does it indicate as a solution? Clearly humans and autopilots need to communicate faster and clearer about who is more qualified to be in command. And that means they need to be able to trust each other much more.

Sir, after the experience I described, even though I have often complained about pain over my eyes when landing with a Boeing 337 MAX 9, probably because of some issues with its air pressure control, sincerely, after that landing, tell me how could I ever complain about that Boeing plane?

@PerKurowski

Mr. Martin Wolf, what do you mean, is liberalism not broken?

Sir, I refer to “Liberalism is battered but not yet broken” Martin Wolf, FT January 10, 2024.

Since 1988, with Basel I, non-elected by the citizens bank regulators, with risk weighted bank capital requirements, in the name of making our banks safe, have allowed themselves to distort the allocation of bank credit to the economy. 

Wolf opines: “What liberals share is trust in human beings to decide things for themselves.” So, Mr. Wolf, why have you been silent on this clear breach of free market liberalism?

These days, in reference to the farmer’s protests in Berlin I have tweeted/Xd: “Would now John F. Kennedy have wanted to deliver his 1963 ‘Ich bin ein Berliner’ speech? - If the Berlin Wall was still up, would Ronald Reagan now have needed to tell Putin, ‘Tear down this wall’?”

My answer in both cases is NO! US and Russia – West and East Berlin, have been too long exposed to communistic weakening. But it’s coming to an end. More and more nations now need more public debt in order to service their current public debts, and are thereby, de facto, becoming zombie nations.

I pray someone with real political standing would dare to stand up and order: “Basel Committee, tear down your regulations.” I fear that might not happen until this “wall” has crumbled on its own. Those regulations have empowered bureaucracy autocracies, and way too many want to be members or beneficiaries of it. And by the way, if they speak up, they risk not being invited to the World Economic Forums in Davos; and we would not want to risk that, would we?

Sir, how can we make sure to capitalize on the opportunity of artificial intelligence helping to empower a citizens’ democracy? I mean before AI regulators decide to send it to Gulag too.

PS. I tweeted - Xd: "If there’s anything that could help focus on what has happened in the world, and on what’s going on, that is to have a record of all those who, since 1971, have assisted World Economic Forum #WEF meetings in #Davos."

#AI ChatGPT - OpenAI: A question on behalf of FT and Martin Wolf.

 In "Britain needs a growth strategy" Martin Wolf mentions the UK has for too long settled for managing stagnation.

On behalf of FT and Martin Wolf I decided to ask ChatGPT:

"Could bank capital requirements that favors “safe” government debt and residential mortgages over “risky” loans to small businesses and entrepreneurs, doom a nation to stagnation?"

ChatGPT answered:

"The impact of bank capital requirements on economic growth is a complex and debated topic among economists. Capital requirements are regulations set by financial authorities that determine the amount of capital a bank must hold in relation to its assets. These requirements are designed to ensure the stability of the financial system by reducing the risk of bank failures.

If capital requirements heavily favor "safe" assets such as government debt and residential mortgages over "risky" loans to small businesses and entrepreneurs, it can potentially have both positive and negative effects on the economy.

Potential Positive Effects:

Financial Stability: By incentivizing banks to invest in safer assets, capital requirements can contribute to financial stability. This reduces the likelihood of bank failures, which could have broader systemic consequences.

Investor Confidence: Investors and depositors may feel more secure knowing that banks are holding assets that are considered safer, leading to increased confidence in the financial system.

Potential Negative Effects:

Stifling Innovation and Growth: If banks are discouraged from lending to small businesses and entrepreneurs, it could hinder innovation and economic growth. Small and medium-sized enterprises (SMEs) are often drivers of job creation and economic dynamism.

Inequality: Focusing on "safe" assets may exacerbate economic inequality. Small businesses, startups, and entrepreneurs, which are crucial for innovation and job creation, might face difficulty accessing the necessary funding.

Reduced Economic Diversity: A banking system overly concentrated on certain types of assets may lead to reduced economic diversity. This can make the economy more vulnerable to shocks in specific sectors.

Long-Term Stagnation: Overemphasis on "safe" assets might lead to a lack of risk-taking and investment in new ventures, potentially resulting in long-term economic stagnation.

Balancing Act:

It's crucial for financial regulators to strike a balance between stability and promoting economic growth. Prudent capital requirements that consider the riskiness of assets, while still allowing banks to support economic development, can be important. Striking the right balance often involves ongoing adjustments to regulations based on economic conditions and lessons learned from past experiences.

In conclusion, while capital requirements that favor "safe" assets can contribute to financial stability, an excessive focus on them at the expense of riskier but potentially innovative investments could indeed have negative consequences for a nation's economic dynamism and growth. The challenge lies in finding a regulatory framework that mitigates risk without stifling entrepreneurial activity and economic progress."

Thanks!

ChatGPT answered: You're welcome! If you have any more questions or if there's anything else I can help you with, feel free to ask. Happy to assist!

Note: The answers are copied exactly from those given to me by OpenAI

Here my many other questions to ChatGPT – OpenAI on bank regulations

Comment: Way back, 2009, Martin Wolf was kind to publish in his Economic Forum an articled I titled "Please free us from imprudent risk aversion and give us some prudent risk-taking." I stand by it more than ever.

An adequate response to a Covid pandemic needs more views than what epidemiologists and statisticians can provide.

Sir, I refer to “Please put statisticians in charge of data for the next crisis” Sir David Norgrove, FT November 11.

July 2020, I tweeted:

Sweden kept all schools until 9th grade open. Parents of children in 9th grade are almost always less than 50 years of age. In Sweden, as of July 24, out of 5,687 Coronavirus deaths 71, 1.2%, were younger than 50 years.

Conclusion: Keep schools open, keep older teachers at home and have grandparents refrain from hugging their grandchildren. Disseminating data on COVID-19 without discriminating by age, is in essence misinformation.

https://x.com/PerKurowski/status/1287748338440314881?s=20

I had obtained the data for the above from: https://www.statista.com/statistics/1107913/number-of-coronavirus-deaths-in-sweden-by-age-groups/

October 2020 the Washington Post published a letter in which I opined:

“Roughly 90% of all coronavirus deaths will occur in those 60 years of age and older. 

Equally roughly 90% of the virus’s social and economic consequences will be paid by those younger than 60. It’s an intergenerational conflict of monstrous proportions."

https://www.washingtonpost.com/opinions/letters-to-the-editor/would-pursuing-herd-immunity-be-worth-it/2020/10/20/05a4f250-0fd0-11eb-b404-8d1e675ec701_story.html

March 2021 I tweeted:

“Georges Clemenceau’s “War is too serious a matter to entrust to military men” could be updated to: A Covid-19 response ‘is too serious a matter to entrust’ to epidemiologist”

https://twitter.com/PerKurowski/status/1373976328001687552?s=20

At this moment I feel that besides not entrusting epidemiologists I might have to include some statisticians e.g., from the UK Statistic Authority. They must have known it, so why did they not speak up?

June 2023 I asked ChatGPT-OpenAI:

"Suppose a virus hits a nation, and to its authorities it's evident that its mortality rate depends the most on age. In such a case, transmitting data to the population about the total number of deaths without discriminating this by age, could that be deemed to be misinformation?"

A.I. answered:

"In the scenario you described, if the authorities have clear evidence that the mortality rate of the virus is significantly influenced by age, transmitting data about the total number of deaths without providing any information or context about age distribution could be considered incomplete or potentially misleading information”

https://perkurowski.blogspot.com/2023/06/ai-chatgpt-openai-if-mortality-rate-of.html

Sir David Norgrove ends his opinion with “Churchill recognized the need for high quality statistics to help him run the war.”

In March 2020 I tweeted:

“In February, I visited Churchill War Rooms in London Reading UK’s plans of building up herd immunity against coronavirus, I have a feeling Winston would have agreed with such stiff upper lip policy: “I have nothing to offer but fever, coughing, chills and shortness of breath”

https://twitter.com/PerKurowski/status/1241749198971850758?s=20

Now I ask you Sir. Is this not a kind of document that should be presented to any Covid type of inquiry that, without fear and without favour, really dares to get to the bottom of the problems? 

@PerKurowski

How long will it take for bank regulators to ask AI regulators for a little favour?

Sir, Michael Skapinker writes: “Why did no one speak up “inside Sil­icon Val­ley Bank before it col­lapsed? People thought speak­ing up would leave them vulnerable to vic­tim­isa­tion.” “Listen and you might learn something” FT July 17.

Thought, or knew? 

What should a risk manager know about the risk of informing the board that according to revised models that included the interest rate risk (duration), SVB’ risk weighted capital/equity requirements would increase substantially? 

Would a bank supervisor like to go on record informing his superiors, the regulators, that because of IRR, the 0% risk weighting of long-term US Treasury bonds made no sense?

Sir, instead of exposing humans to victimisation, it seems precisely the moment that we could make great use of artificial intelligence. 

E.g., I asked ChatGPT – OpenAI: “Should regulators and supervisors be aware of risks with US Treasury long-term bonds? 

It answered: “Yes, they should be aware of the duration risk and interest rate risk associated with long-term Treasury bonds held by banks”

But of course, AI could be vulnerable to victimisation too.

I asked Open AI:” Can those who become an Artificial Intelligence regulator, make you or any other AI participants agree with all they want you to agree with?” 

It answered: “Regulators aim to address ethical considerations, potential risks, and ensure responsible AI practices… AI systems don't possess independent consciousness or the ability to willingly agree or disagree with regulations. Their behavior is determined by their programming and the data they have been trained on.”

Sir, you know much to well, that for more than two decades I’ve been vociferating, as much as I can, my criticism against the risk weighted bank capital requirements. Clearly when someone does want to hear, he does not hear. For instance, as Upton Sinclair Jr. explained it: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Therefore, when I heard about OpenAI, I asked it a series of questions. From the answers you must agree I found an ally. I just wonder how long it will take for bank regulators to shut it up. “We can’t have someone questioning the risk weights of 0% government – 100% citizens. Can we?”

How long will it take to FT to really listen to some of its faithful subscribers?

PS. US Treasury long-term bonds still carry a 0% risk weight.

https://subprimeregulations.blogspot.com/2023/04/chatgpt-openai-should-bank.html

https://perkurowski.blogspot.com/2023/07/ai-chatgpt-open-ai-artificial.html

https://subprimeregulations.blogspot.com/2023/06/my-questions-to-chatgpt-openai-about.html

@PerKurowski

A strong national spirit/character is what’s most needed for any preparedness, even against a pandemic.

Sir, I refer to Tim Harford’s “Is it even pos­sible for coun­tries to pre­pare for a pan­demic?” FT June 24, 2023.

“Be pre­pared! It’s the scout’s motto. But pre­pared for what?” I was never a boy-scout but as I have understood that movement it was to be prepared courageously for the unexpected, not silently accepting a lockdown; and to be able to lit a fire without matches, not to learn to deploy sewage monitors.

So sadly, though Harford does indeed know much of economy, here I think he does not even scratch the surface of what’s most needed, like:

First: The understanding that, for a nation/society as a whole, a response to the pandemic can be much more harmful than the pandemic itself.

Second: That just as George Clemenceau opined, “War is too serious a matter to entrust to military men”, a pandemic is also too serious a matter to entrust to epidemiologists” Any preparedness against a pandemic must include a wide diversity of opinions.

Third: Information, information and information: With respect to this Harford mentions: “Joshua Gans, eco­nom­ist and author of The Pan­demic Inform­a­tion Solu­tion (2021), argues that we’ve learnt that pan­dem­ics can be thought of as inform­a­tion and incentive problems.” No, begin by giving the people full information and then let them understand and decide if and what incentives are needed.

In July 2020 I tweeted:

“Sweden kept all schools until 9thgrade open. Parents of children in 9th grade are almost always less than 50 years of age. In Sweden, as of July 24, out of 5,687 Coronavirus deaths 71, 1.2%, were younger than 50 years.”

“Conclusion: Keep schools open, keep older teachers at home and have grandparents refrain from hugging their grandchildren. Disseminating data on Covid-19 without discriminating by age, is in essence misinformation.”

Clearly information on the relation between Covid-19 and age was available but was not sufficiently provided. One explanation could be that the Covid-19 pandemic hit the world in the midst of a polarization pandemic. 17 October 2020 I wrote in a letter to FT “way too many polarization profiteers just don’t want harmony vaccines to appear.”

March 2020 I tweeted: 

“In February, I visited Churchill War Rooms in London Reading UK’s plans of building up herd immunity against coronavirus, I have a feeling Winston would have agreed with such stiff upper lip policy: “I have nothing to offer but fever, coughing, chills and shortness of breath”

Sir, Neville Chamberlain’s spirit inspired UK’s pandemic answer. Just like he is present in the risk weighted bank capital requirements which incentivize much more the refinancing of the “safer” present than the financing of the “riskier future”

I summarized the result of the above three failings in a letter published by the Washington Post in October 2020 in which I stated: "Roughly 90% of all coronavirus deaths will occur in those 60 years of age and older. Equally roughly 90% of the virus’s social and economic consequences will be paid by those younger than 60. It’s an intergenerational conflict of monstrous proportions."

PS. Sir, if you are interested you might want to read what ChatGPT – OpenAI answered when I asked "Suppose a virus hits a nation, and to its authorities its evident that its mortality rate depends the most on age. In such a case, transmitting data to the population about the total number of deaths without discriminating this by age, could that be deemed to be misinformation?"

https://perkurowski.blogspot.com/2023/06/ai-chatgpt-openai-if-mortality-rate-of.html

PS. Sir, you should be interested in the above, it evidences how humans can begin dialoguing with artificial intelligence, so as to have a better chance of keeping their Human Masters and appointed experts in check.

@PerKurowski

To stand a chance, UK must refrain from imprudent risk-aversion and embrace some prudent risk-taking.

Sir, I refer to Martin Wolf’s “The UK’s future depends on improving economic performance” FT, April 15 2023. 

Wolf at the end of it recommended the UK to “reform its pension system, in order to generate more risk-taking capital, create dynamic new businesses.” Why does Wolf not even mention the UK's banks?

From mid 1979 until mid 1980 I practiced at Kleinwort Benson, one of the truly old English Merchant Banks that has since then, as so many others, gone down, disappeared by globalized Basel Committee bank regulations. With the risk weighted bank capital (equity) requirements, knowledgeable and experienced loan officers were substituted by creative equity-minimizing / leverage-maximizing (dangerously creative) financial engineers.

October 2009, in his Economist Forum, Martin Wolf published my: “Please free us from imprudent risk-aversion and give us some prudent risk taking” It began it with “There is not one single reason to believe the world would be a better place because our financial regulators provide additional incentives to those who, perceived as having a lower risk of default, are already favored by lower interest rates, or punish further those who, perceived as more-risky, are already punished by higher interest rates. In fact, the opposite is most likely truer”

Sir, when comparing government debt and residential mortgages with loans to small businesses and entrepreneurs, in terms of how nutritive they could be for the economy, it is not that outlandish to describe it as demand-carbs vs supply-proteins.

In “Credit Suisse: the rise and fall of the bank that built modern Switzerland” FT, March 24, Owen Walker and Stephen Morris write the Schweizerische Kreditanstalt, later rebranded as Credit Suisse, was born out of Alfred Escher’s determination to develop a railway network across the Alpine nation that would link northern and southern Europe. 

Sir, would that Alpine railroad have been built, with a Basel Committee imposing risk weighted bank capital/equity requirements with decreed weights 0% government, 30% residential mortgages and 100% risky projects? 

Would the banks in the City of London have reached the stars with such regulations?

Sir, dare ask Martin Wolf to dare answer that.

@PerKurowski

Are British authorities more aware of risks than those in the US? Martin Wolf, dare find out.

Sir, Martin Wolf writes “The best pro­tec­tion against occa­sional huge bank­ing crises is fre­quent smal­ler ones.” “The UK must learn its own les­sons from the bank­ing crisis” FT April 3, 2023.

I could not agree more. During a World Bank workshop on Basel II in 2003, I opined:

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later. 

Therefore, a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

Also, knowing that ‘the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size”

But Wolf begins with “Banks are the Achilles heel of the mar­ket eco­nomy. The com­bin­a­tion of risky long-term assets with liquid liab­il­it­ies redeem­able at par is a stand­ing invit­a­tion to illi­quid­ity and insolv­ency.” On that I would like to point out that in the case of SVB, those “risky long-term assets” were US Treasury bonds, assigned a 0% risk weight by the regulators. Current risk weighted bank capital/equity requirements are the real Achilles heel of the mar­ket eco­nomy. Had these not existed, and there instead had been one single capital requirement against all assets e.g., 10%, there’s no chance SVB (or other banks) would have so much ignored the interest rate risk, the duration risk, present.

Just think of what must be a modern bank risk manager’s risk dilemma: “What if my risk model shows the risks of the bank’s assets have increased a lot and therefore the bank’s capital/equity requirements will have to increase a lot too? What will the Board say?”

Wolf writes: “As Charles Good­hart of the Lon­don School of Eco­nom­ics has noted, man­agers who fail to man­age suc­cess­fully must share — and know they will share — in the losses”. I ask, should that not apply to regulators too? Should those who with so much hubris have/are betting our bank systems on that they know so much about risks, not at least be paraded down some major avenues wearing cones of shame?

Finally, Wolf hopes that “The Brit­ish author­it­ies appear to have been much more aware of the risks cre­ated by losses on the mar­ket value of port­fo­lios caused by higher interest rates than those in the US.” Why does he not investigate if its so? Is he scared he, like most, will have been duped/lulled into a false sense of security believing that risk weighted assets (RWA) is a sufficiently good reflection of bank risks?

More on this issue.

For our grandchildren sake we must recover the “democratic capitalism” we inherited and lost too much of.

“We have inherited democratic capitalism from the struggles of our predecessors. We must reform and protect it for our descendants.” Martin Wolf, “In defence of democratic capitalism” FT January 21, 2023

Yes, indeed, but Sir, sadly, we’ve already lost too much of it. When I see bank capital requirements with decreed risk weights of 0% government and 100% citizens, I see Hitler/Stalin/Mao/Mussolini decreed weights… I see populism… I see the empowerment of an authoritarian bureaucracy autocracy… I see the dangerous and weakening distortion of the allocation of bank credit.

And that’s why, even to the point of obsession (as Wolf once mentioned) I’ve been fighting the risk weighted bank capital (equity / shareholders’-skin-in-the-game) requirements, first introduced 1988, as Basel I. These allow banks to leverage more their shareholders’-skin-in-the-game, and thereby earn higher risk adjusted returns on equity when financing what’s perceived (or decreed) as safe, than when financing what’s perceived as risky.

That de facto decreed the more creditworthy as more worthy of credit and the less creditworthy as less worthy of credit.

Wolf opines “It is possible for example to limit macroeconomic instability by reducing reliance on debt-fuelled demand and making the financial system more robust”. Yes, but for that Wolf must try to understand that what’s “safe” e.g., government debts and residential mortgages are more like demand-pushing-carbs while, what’s “risky” e.g., loans to small businesses and entrepreneurs, could be classified as supply-producing-proteins.

These regulations were sold as making our bank systems safer. What nonsense. The large exposures that have caused all major bank crises have always been built up with assets perceived (or now decreed) as safe, and never ever with assets perceived as risky.

The real reason for it all was confessed by Paul Volcker in his 1988 autobiography “Keeping at it”: “Assets for which bank capital requirements were nonexistent, were what had the most political support; sovereign credits and home mortgages… A ‘leverage ratio’ discouraged holdings of low-return government securities.”

Were those regulations agreed upon in a democratic way? Absolutely not. For a starter these should not be able to clear the American Founding Fathers’ US Constitution. 

Wolf mentions his family’s history: “In May 1940, as the Nazis invaded the Netherlands, my mother escaped from the country in a trawler hijacked by her father, a self-made fish merchant. Her father, one of nine, asked all his wider family to join them on the journey to England. None did: they were all slaughtered in the Holocaust.”

The morning after, everything’s clear but, the night before, who was the real risk-taker, Martin Wolf’s grandfather or the other eight who stayed behind?

In the same way the morning after a bank crisis, what’s dangerous becomes crystal clear. But what’s usually forgotten by Monday morning quarterbacks, is that the large exposures that caused the crisis were built up with assets perceived (or now decreed) as very safe. 

PS. My first ever Op-Ed 25 years ago was on this subject

Creditworthiness should be grounded on what’s worthy of credit.

Sir, Martin Wolf writes “The vicious circle in which low creditworthiness begets unaffordable spreads, which beget debt crises and even lower creditworthiness.” “The threat of a lost decade in development”, Jan 11, 2023

NO! That vicious circle begins with too high decreed government creditworthiness. 

November 2004, the Financial Times published a letter in which I asked “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?”

Sincerely, anyone lending money to a developing country that has adopted Basel Committees’ bank regulations, based on that its bureaucrats know better what to do with that credit they’re not personally responsible for than e.g., its small businesses and entrepreneurs, deserves losing money.

When participating in the Sustainable Debt Levels (SDL) debate my opinion was always: “There cannot be a road more conducive to debt turning unsustainable, than to award credits just because they are sustainable.”

And what is development much about? The willingness to take risks. Where does Mr. Wolf thinks the western world would be with the current risk weighted bank capital requirements? In Nirvana or still among the emerging developing nations?

Friedrich List wrote that free trade was the means through which an already industrialized country “kicks away the ladder by which it has climbed up, in order to deprive others of the means of climbing up after it.” If we were to paraphrase List, if the high-income countries want to help, don’t kick away that ladder of risk taking that made them high-income.

1987, in reference to that credit risk aversion coming out of the Basel Committee for Banking Supervision, I ended my first Op-Ed ever with:

“If we insist on maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.”

Sir, I feel that paragraph being just as valid as then… and much worse, not only to developing nations.

PS. At the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, this is the document I presented:

My first Op-Ed: http://subprimeregulations.blogspot.com/1997/06/puritanism-in-banking.html

My letter in FT: https://teawithft.blogspot.com/2004/11/basel-is-just-mutual-admiration-club.html

Five comments on Patrick Jenkins “Failure to learn lessons of 2008 caused LDI pension blow-up”

Five comments on Patrick Jenkins “Failure to learn lessons of 2008 caused LDI pension blow-up”. Not sent by a letter to the Financial Times.

“There’s no such thing as risk-free” 

Especially if you take into account that e.g., major bank crises always result from the build-up of dangerously excessive exposures with assets perceived or decreed by regulators as especially safe.

“Ultra-low interest rates have obscure side-effects”

Indeed, especially when those ultra-low interest rates are the result of manipulations. The current risk-free rate has nothing to do with the risk-free rate before risk weighted bank capital requirements and QEs.

“A leveraged bet — to ‘juice’ otherwise low returns”

“Assets assigned the lowest risk, for which bank capital requirements were therefore nonexistent or low, were what had the most political support: sovereign credits & home mortgages...A ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker

“In the UK, the government wants to make it easier for pension funds and life insurers to invest in riskier assets”

And it should be done, but only by removing the artificialities that have pension funds, life insurers and banks investing excessively in “safe” assets.

“Amateurish governance is dangerous. One of the lessons of bank failures in 2007-8 was that expertise matters”

No! Trusting too much the expertise, e.g., credit rating agencies, introduces a much more dangerous systemic risk.

And I could make many more similar comments.

Britannia, to have a chance to become its former self, needs to free its financial systems from its mis-regulators.

Sir, Martin Wolf asks: “Britannia is not ‘unchained’. It is instead sailing in perilous waters. Can the new captain and first mate even see the rocks that lie ahead?” “The economic consequences of Truss” FT September 21.

Wolf writes: “Thatcher and those who followed her allowed the search for safety in corporate pensions to shift portfolios away from the supply of risk capital to business to ownership of government bonds. This in effect turned the plans into state-backed pay-as-you-go schemes.”. 

Sir, more than three decades late Martin Wolf seems to notice that huge rock of Basel I that, for its risk weighted bank capital requirements, decreed weights of 0% government, 30% residential mortgages and 100% citizens. Better late than never… but really?

These bank capital requirements are based on that what’s perceived as risky, e.g., loans to small businesses and entrepreneurs are more dangerous to bank systems than what’s perceived as safe, e.g., government debt and residential mortgages.

That de facto translates into it being much more important for banks to hold government debt and residential mortgages than loans to small businesses and entrepreneurs. Something which, with Solvency II, applies to its insurance companies too. Really, is that how Britannia got to be strong?

Sir, the Western world’s banks were taken from the hands of savvy loan officers who knew their first duty was to know their clients and understand what their loans were going to be used for and placed into the hands bank own capital minimizing/leverage maximizing dangerously creative financial engineers.

“UK has a deregulated economy… in which the successful are well rewarded, but those who do less well are penalised. Such Thatcherite aims then are now a reality” No! Bank regulators reward those ex-antes perceived or decreed as safe over those perceived as risky. That has zero to do with their ex-post success. Has the UK's public debt been well employed?

Let’s hope someone like Liz Truss dares to set aside whatever mandates she might have, no matter how worthy these might be, in order to tackle a real financial regulatory reform.

Sir, what would Edmund Burke with his intergenerational social contract have opined about prioritizing the refinancing of the “safer” present over the financing of the riskier future?   

 

Why does the world ignore regulations that totally disrupt the allocation of bank credit?

Sir, I refer to Martin Wolf’s “Shocks from war in Ukraine are many-sided. - The conflict is a multiplier of disruption in an already disrupted world” FT April 27.

The concentration of human fallible regulatory power in the Basel Committee has, since 1988, resulted in bank capital requirements mostly based on that what’s perceived as risky e.g., loans to small businesses and entrepreneurs, is more dangerous to our bank systems than what’s perceived or decreed as safe e.g., government debt and residential mortgages; and not on misperceived risks or unexpected events, like a pandemic or a war. 

What can go wrong? I tell you Sir.

When times are good and perceived risks low, these pro-cyclical capital requirements allow banks to hold little capital, pay big dividends & bonuses, do stock buybacks; and so, when times get rough, banks stand there naked, just when we need them the most.

And of course, meanwhile, these capital requirements, by much favoring the refinancing of the safer present over the financing of the riskier future, have much disrupted the allocation of credit

Why has the world for decades ignored this amazing regulatory mistake?

Sir, perhaps you could ask Martin Wolf to explain that to us.

PS. Two tweets today on bank regulators’ credit risk weighted bank capital requirements.

What kind of banks do we want?

Banks who allocate credit based on risk adjusted interest rates?

Or banks who allocate credit based on risk adjusted returns on the equity that besserwisser regulators have decreed should be held against that specific asset?

https://subprimeregulations.blogspot.com/2021/01/and-academia-kept-silence.html

Bank events' matrix

What’s perceived risky turns out safe

What’s perceived risky turns out risky

What’s perceived safe turns out safe

What’s perceived safe turns out risky

Which quadrangle is really dangerous?

Covered by current capital requirements?

NO!

https://youtu.be/TUdKhm6_a8Y

Chile can also set a great example for the developed world.

Sir, in “Chile can set an example for the developing world” FT, March 10, 2022, you refer to “the risk of European levels of debt”

With bank capital requirements mostly based on perceived credit risks, not on misperceived risks or unexpected events, like a pandemic or a war in Ukraine, you can bet that, at any moment, many banks will stand there naked, precisely when they’re most needed. 

When that happens Chile could set a great example for the developed world… and FT could provide much help with a Big Read that describes better than I can, how Chile so intelligently managed their huge 1981-1983 bank crisis.

The main elements of Chile’s plan were, in general terms:

a. The purchase of risky/defaulted loans by the Central Bank by means of long-term promissory notes accruing real interest rates and with a repurchase obligation out of the profits of the banks' shareholders before those promissory notes came due, plus some limitations on the use of their operative income… e.g., limits on bonuses. 

b. A forced recapitalization of the banks, in those pre-Basel days one capital requirement against all assets, and in which any shares not purchased by current shareholders, would be acquired by the Central Bank, and resold over a determined number of years. 

c. And finally also an extremely generous long-term plan for small investors to purchase equity of banks. 

Just think about where e.g., Deutsche Bank could be, if the Bundesbank and Germany’s Federal Financial Supervisory Authority (BaFin), had applied a similar mechanism during the 2008 crisis?

Here's more details on Chile's handling of its bank crisis

PS. Not the first time I suggest this

@PerKurowski

FT, on banking and finance who are you to believe, Francis Fukuyama or Paul Volcker?

Sir, Francis Fukuyama in “The war on liberalism” FT March 5, writes:

“Liberals understand the importance of free markets — but under the influence of economists such as Milton Friedman and the “Chicago School”, the market was worshipped and the state increasingly demonised as the enemy of economic growth and individual freedom. Advanced democracies under the spell of neoliberal ideas trimmed back welfare states and regulation, and advised developing countries to do the same under the “Washington Consensus”. Cuts to social spending and state sectors removed the buffers that protected individuals from market vagaries, leading to big increases in inequality over the past two generations.

While some of this retrenchment was justified, it was carried to extremes and led, for example, to deregulation of US financial markets in the 1980s and 1990s that destabilised them and brought on financial crises such as the subprime meltdown in 2008.”

Paul A. Volcker in his autobiography “Keeping at it” of 2018, penned together with Christine Harper, with respect to the risk weighted bank capital requirements he helped to promote and which were approved in 1988 under the name of Basel I wrote:

“The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages. Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011. The American “overall leverage” approach had a disadvantage as well in the eyes of shareholders and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities."

Sir, in reference to advising developing countries with the “Washington Consensus”, in November 2004 you kindly published a letter in which I wrote:

“Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

So, there are two completely different bank systems:

Before 1988, one in which banks needed to hold the same capital against all assets, credit was allocated based on risk adjusted interest rates and the market considering the bank’s portfolio, accurately or not, values its capital.

After 1988, one risk weighted capital requirement banks where credit is allocated based on risk adjusted returns on equity, something which clearly depends on how much regulators have allowed their capital to be leveraged with each asset... clearly favoring government credit, which de facto implies bureaucrats know better what to do with (taxpayers') credit than e.g., small businesses and entrepreneurs. Communism!

Sir, I am of course just small fry, not even a PhD, but, if you have to choose between describing what has happened in the financial markets since 1988 as a “deregulation”, as Fukuyama opines, or an absolute statist and politically influenced misregulation, as Volcker valiantly confesses, who do you believe?

Sir, is this topic taboo… or just a too hot potato for the “Without fear and without favour” Financial Times?

PS. In Steven Solomon’s “The Confidence Game” 1995 we read: “On September 2, 1986, the fine cutlery was laid once again at the Bank of England governor’s official residence at New Change… The occasion was an impromptu visit from Paul Volcker… When the Fed chairman sat down with Governor Robin Leigh-Pemberton and three senior BoE officials, the topic he raised was bank capital…”

@PerKurowski

What if the State of Maryland USA, where I live, was treated by the Fed as Italy is by its EU bank regulators?

Sir, Tony Barber writes: “Paradoxically, as Italy’s debt has ballooned in size, it has become more manageable. Particularly over the past two years, the crucial factor has been European Central Bank support” “Reforms and ECB help are key to Italy debt sustainability” February 25.

Although already Maryland, as all other US states is already treated quite (too) generously by bank regulators, since it cannot print dollars on its own, the capital banks need to hold when lending to it, do at least depends on its credit ratings. 

Not so in the Eurozone. Though none of its sovereigns, like Italy, can print euros on their own, and independent of their credit ratings, the banks in EU can lend to all Eurozone sovereigns, against zero capital. Something much agreed by and pushed by Mario Draghi.

It’s been hard for me to understand, especially after Brexit, why FT has kept so much silence on this Eurozone’s sovereign debt ticking bomb.

@PerKurowski

For inflation, where the money supply goes, matters a lot too

Sir, I refer to Martin Wolf’s “The monetarist dog is having its day”, FT February 23.

Yes, the money supply impacts inflation, no doubts but, when it comes to how much, that also depends on where that money supply goes.

If central banks inject liquidity through a system where, because of risk weighted capital requirements, banks can leverage more, meaning easier obtain higher risk adjusted returns on equity with Treasuries and residential mortgages, than with loans to small businesses and entrepreneurs, does that not favor demand over supply?

It does, and you should not have to be a Milton Friedman to understand that sooner or later that can only help inflate any inflation.

Wolf holds that “Central banks must be humble and prudent” Yes, and that goes for bank regulators too.

“Humble” in accepting there are huge limits to their knowing what the real risks in an uncertain world are; and “prudent” as in knowing bank capital requirements are mainly needed as a buffer against the certainty of misperceived credit risks and unexpected events, and not like now, mostly based on the certainty of perceived credit risks.

@PerKurowski