May 31, 2008

What kind of reporting is this?

Sir Benedict Mander reports that “Drivers put cars blame on chávez for Caracas congestion” May 30, and nowhere does he mention that the purchases of cars is subsidized by means of the foreign exchange system and that petrol is sold for about 2 cents of a Euro per litre, and which has made a small country like Venezuela import 750.000 new cars to place on already jammed roads, in just two years. What kind of reporting is this?

Is Benedict Mander trying to hide the fact that this supposedly socialist government is taking way over 10% of Venezuela’s GDP from the poor people who have nothing and giving it to those citizens who have a car?

If you have to handle uncomfortable truths, go for the right ones.

Sir Philip Stephens in "Uncomfortable truths for a new world of them and us" May 30 blames the subprime mortgages turmoil on "the explosion in financial innovation made possible by ever more sophisticated information technology. This has… engendered among investment bankers and traders an insouciant indifference to risk". The real truth is much more uncomfortable than that.
The subprime mess has nothing to do with sophistication but with the fact that those who had been empowered by the regulators as supreme risk surveyors, the credit rating agencies, just did not do their job right finding out some very basic faults with the mortgages and that should have been easy to spot.
Stephens, referring to Washington consensus type of preaching to the developing world now tells us that in response to the turmoil the developed world must show the "willingness to see that this is a transformational moment that demands we look at the world entirely afresh".
He is right; and one of the issues on that urgent agenda must be to annul the dangerous paradigms that have taken over financial regulations. The first being that the only purpose of bank regulations is to avoid a bank crisis, when there is so much more to banking than that, and the second, the one that relates to the uncomfortable truth above, that it tremendously unwise to delegate so much regulatory risk surveillance power in some few agents that, as humans, are bound to err and take us over ever more dangerous precipices.

May 30, 2008

When in Rome, do not try to see every attraction but do not miss what has to be seen either

Sir Robert Zoellick making reference to a meeting among world leaders in Rome prescribes “A 10-point plan for the food crisis” May 30. That plan is somehow confusing in that it mixes immediately needed actions, the first three, that of fully funding the World Food Programme’s emergency needs; the support of vital safety nets and facilitating the access to seeds and fertilizers in poor countries, with other seven points, on some of which there is even an ongoing debate about whether they are right or wrong, like for instance whether to step up ethanol production from sugarcane, which consumes a disproportionate amount of water.

Since this food crisis relates more to economic growth and energy related than to unforeseen weather disasters, and there are many official watchdogs like the International Energy Agency, the Consultative Group on International Agricultural Research, even the World Bank, supposed to keep their eyes open, my suggestion of an 11th point, I believe far more important those point 4-10 suggested by Zoellick, is to figure out why world has been so taken by surprise with this food crisis and what can be done to improve the foresight.

Rating the rating agencies would be just digging us deeper in the hole.

The last thing we need is to create even more illusion that nothing can go wrong piling on top of current realities the concept of an AAA rated credit rating agency.

Sir, “Who rates the ratings agencies?” May 30, starts from the premise that the credit rating agencies need to keep the immense powers that regulators have awarded them and that they therefore need to get better. You are wrong on that! The way to go is to reduce the powers of the credit rating agencies and so that the rest of the market have better incentives to analyze credits, for instance banks could instead of rating readers and rating predictors employ credit analyst again.

If the banks were just needed to report as an information the minimum capital requirements as judged on the basis of the assessments of the credit rating agencies but were actually not forced to apply these capital requirements, and for example go for a fixed percentage of capital to credit instead, then that would make of credit rating agencies what they are supposed to be, information providers, and not what they are, regulation enforcers.

May 29, 2008

Let us also free the development experts!

Sir William Easterly, himself a development expert, after reading the report of the World Bank Growth Commission, tells us to trust the people, instead of development experts, “Trust the development experts – all 7bn of them” May 29.

Easterly bases his conclusions on Friedrich Hayek’s teachings on the need of freedom for “multitudinous individuals to figure out their own answers” arguing that experts cannot impose this freedom from the top down. He is right but having, as a former Executive Director of the World Bank 2002-2004, witnessed myself how the risk aversion of those who manage the business of development; the vested interest of those who hire the development experts, the governments; and the experts own often non functional peer reviews all conspire against creativity and promotes useless development jargon, we should not forget that the experts are also in need of much more freedom.

May 28, 2008

Humans and animals are still challengers to oil.

Sir although Daniel Yergin is absolutely right reminding about the disastrous effects of the price collapses [of oil] in 1986 and 1989 in "Oil has reached a turning point", May 28, it is much harder to agree that oil “seems to be losing its almost total domination in ground transport”, because of ethanol... since hybrids still run on oil.

In a world where cyclists and animal pulled carts are going over to cars and trucks, in many places, high oil prices, just makes humans and animals real alternatives again. Of course we could get some petrol out of coal, but, when push comes to shove, that is just another sort of oil, though perhaps slightly dirtier, no matter what the clean coal slogan says.

When it comes to oil FT does not write without fear and favour.

Sir once again, when it comes to oil, I feel that what is most valid about FT’s “Without fear and without favour” are the quotation signs. In your “Pumped up”, May 28, you refer to a study that finds that “UK duty was 20% higher in real terms in 2000” and you therefore happily conclude that “it is not the cause or rising fuel prices” Why did you not compare it to a year when petrol duties really started to increased, like for instance 1980?

You talk about that driving is getting costly, but you do not dare to specify the components of that cost, could that be because the taxman still gets more than the oil man?

May 21, 2008

Hey, you missed the story!

Sir, "Moody's error gave top ratings to debt products" May 21, is presented as a "human bites a dog" story even though it really is a "dog bytes a human" event. We all know that Moody and all the others are bound to commit errors, it is only human and must be forgivable, just as then try to cover up those errors is also human though not as forgivable.

The real story is how these agencies could have been regarded as infallible by the regulators who empowered them, and thereby forcefully or suggestively induced the market to blindly follow their ratings.

The article states "Credit ratings are hugely important within the financial system because many investors – such as pension funds, insurance companies and banks – use them as a yardstick to restrict the kinds of products they buy, or to decide how much capital they need to hold against them" and this gives the impression that the use or not of the credit ratings is a voluntary issue, which is clearly wrong. The investors mentioned, use the credit ratings because they have been strictly ordered to do so by their respective regulators.

Now if they managed to get you to spin a story about a once in a lifetime crazy mistake event that is never ever to happen again, then let me assure you that someone is shamelessly using you.

Yes, it is awfully hard to have the cake and eat it too!

Let's face it, globalization is awfully hard to discuss when "like most of us do we try to have our cake and eat it too and Martin Wolf's "How to preserve the open economy at a time of stress", May 21, is but another example of it. I agree with it all, full-heartedly, yet I have not the faintest idea of what I really have agreed with. It might be that we need to simplify the whole globalization equation in more manageable pieces.

Martin Wolf mentions for instance "redistributing the spoils of globalization, not sacrificing them" and which sounds a quite sensible thing to do. But that would have to start by identifying the spoils and perhaps wake up to the fact that the spoils are not to be found in a faraway country but in your own neighbourhood, in your own friendly neighbours courtyard.

Trying to speculate about where the non-obvious spoils are to be found, as those arising from higher prices of commodities are easier to identify, I frequently end up making two questions that might indicate possible new direction, exactly the purpose of questioning.

The first is. Is it logical that profits made by competing nakedly cost to cost in an efficient market should be taxed at the same rates that profits derived from an activity to which society has provided special shelter, like intellectual property rights?

The second, much more mundane, is why should a sportsman that earns a fabulous amount because he plays in a franchise with global reach pay income taxes based on where he slugs or kicks it out? Should he not pay it to his homeland or proportionately to where his audiences are?

Many of the consumers have had oil at $130 for decades!

Sir may I congratulate on placing the current price of oil in its true perspective saying "When oil was $10 a barrel, the idea that the stuff was running out seemed demented", "Solving the $130 oil conundrum, May 21.
It is exactly in that "dementia" during the last oil bust-boom (where you place yourself depends on whether you are an extractor or a consumer) that we find the origin of the current boom-bust, and so let us hope that a similar dementia is not present this time. This requires being sincere with the facts.
Among the little acknowledged oil facts is that for instance that the European consumer and many others have already for decades been living with oil in the $130, only that instead of the extractor getting that value it was the taxman. While oil prices were nudging down to the $10 you mention, taxmen were stealthily increasing their take...will they now reduce it?

May 16, 2008

Oil was at almost 10$... and heading south!

Sir, why are you distorting the truth? In a "Time to convene a summit on oil" May 16 you refer to the inexorable rise in the oil price from below 20$ to 126$ in less than a decade. If that had happened we would probably not seeing the current conditions but the fact is that late 1998 the price of oil got close to 10$ creating havoc for producers and investors alike (and for Venezuela bringing us chávez) and you know that as late as April 1999 even The Economist published an article arguing it was going for 5$ and FT must have echoed the same beliefs.
If an oil summit between the consumers and the oil extractors is to succeed then it has to build on the truth. And the truth should be spelled out without fear and without favour. Don't you think so?

May 15, 2008

Could we please have our active commercial bankers back?

Sir Evan Salway is right when he urges to "Rethink the 'active versus passive' investment debate" May 15, but much more important is the issue of whether we want active versus passive bankers. I sure do!
Since it is the commercial banker's true societal role to be actively out there in the real world developing his skills in listening and analyzing the many different lending opportunities I feel saddened by seeing the bankers turning into passive credit-rating-agency-criteria followers and automated executioners of trading opportunities identified by computers running models that none of them fully understand.
Banking regulator in Basle...could we please have our active commercial bankers back?

Should central bankers be allowed to own assets?

Sir in reference to your leader "The great asset price controversy" May 15 one could wonder if the first step should not be that of prohibiting central bankers from owning assets as one must wonder how many, if not all of them, were plainly delighted seeing the value of their houses go up and up... like a beautiful balloon full of hot air.

May 14, 2008

Americans, how sure are you it is not Mr. Jones that you should blame?

The fundamental driver of the unease with globalization is the reduction of the share of decent salaries paid in the gross global production (GGP) and since “decent salaries”, whatever that means, has almost exclusively to do with the developed world, there is a growing grumbling in the western world that this globalization thing might not have been such a bright idea after all.

Clearly, if an American holds that the world has to stop growing, immediately, so that he can go back to his 2 dollar per gallon of gas, he has a point, though he would also have to explain what to do with a paralyzed world.

Devesh Kapur, Pratap Mehta and Arvind Subramanian, “Is Larry Summers the canary in the mine?, May 14, worry that American liberal intellectuals might now team up with Lou Dobbs and produce a pure local US knee jerk reaction, which would be both dangerous and unproductive for the whole world, instead of teaming up with them in finding some valid solutions for all. They are very right about that.

Americans should know that when you build an isolation wall the worst part is how difficult it is to be 100% sure that you got stuck on the right side of it and so, before shutting themselves out, they would de well trying to get at the root of who are really capturing a larger share of the GGP, since besides from those obviously benefiting from the commodity boom, one of the culprit might even be their next door neighbour, Mr. Jones.

But we did what the market told us to do not long ago!

Sir Martin Wolf tells us that “The market sets high oil prices to tell us what to do” May 14, but we should not forget that the same market, less than a decade ago, priced the barrel of oil under 10$, and according to some pundits it was heading for 5$, and that in fact many of our current problems are derived from doing exactly what those low prices told us to do.

Martin Wolf also quotes the International Energy Agency in order to establish a case for extremely tight oil markets but what was this agency saying just a few years ago? Why are they to be more credible now?

What Martin Wolf does not mention are the alternatives to the short term markets in oil and that some long term take up contracts between producing and consuming countries, based on some reasonable in between prices, could create stability and reduce volatility in the oil markets for the benefit of all...less the short term speculators of course.

There is indeed a case for a league of “real” democracies

Sir Robert Kagan writes about “The case for a league of democracies” May 14, and of course there is such a case, as long as we are talking about real democracies. Many citizens around the world pray for the existence of a club where only governments that show their own people their utmost respect could be members, and where not belonging to it, helps to send an unequivocal shaming message.

Now for this to be a true example-setting club, it should not be possible to become a member by sheer political wheeling and dealing, but only by meeting a set of very strict criteria that go much further than just having a popular vote.

For instance Venezuela though presumably having a popular elected government, should not be able to be a member of such club since though it is a very polarized country it yet has a Congress that includes 167 members who are in favour of him who wishes to be called ‘Commander’, and none, zero, zilch, of those many who are not the least in agreement with that. Additionally Venezuela, as an oil cursed country that by centralizing the revenues from the oil in the State has a government that is wealthy and powerful independently of its citizens, should obviously not be admitted to a club of real democratic leaders.

May 12, 2008

And then on top of it all there is the regulatory tax on risk.

Sir I could not be in more agreement with what Eric De Keuleneer has to say in his letter “Step up competition for banks and rating agencies”, May 12 in relation to taking away the powers the credit rating agencies have been given to distort the markets, as you must know having received at least 100 of my letters on the subject over the last years. That said Mr. De Keuleener does not mention the current tax that the minimum capital requirements for banks impose on risk.

Under the current Basel I Standardized Approach, a low risk corporate loan (rated AAA to AA-) requires a bank to hold only 20% of the basic 8% capital requirement, meaning 1.6 in units of capital, while a much riskier loan (rated below BB-) requires it to hold 150% of the basic 8%, meaning 12 units of capital. If the current cost of capital for the bank is 15%, then the bank's carrying cost for the low risk credit is 0.24% (8%*20%*15%) while the bank's carrying cost for the high risk credit is 1.80% (8%.150%*15%), thereby producing an additional cost of 1.56% that must be added on to the normal spread that the market already requires from the higher risk credit when compared to the lower risk one.

This mind-boggling 1.56 basis points regulatory tax on riskier but frequently more needed credits when compared to low risk but often not so productive loans, dwarves any Tobin tax proposals both in terms of costs and distorting signals, but it is blithely ignored.

May 09, 2008

What is the purpose of the financial institutions?

Sir Evelyn de Rothschild writes passionately that “Ethical standards must be restored in finance”, May 9 and we all agree. That should begin though by clarifying what is the purpose of the financial sector since without that ethical standards would indeed be hard to define.

In fact given that the current purpose of the financial institutions seems to be extracting as much profits and bonuses as possible from them, some could even argue that there has been quite a lot of ethical behaving lately.

What is the purpose of our banks?

Samuel Brittan in “The financial crises of capitalism” May 9 says that “The beginning of wisdom is to recognize that boom and busts have been a feature of capitalism from the start”. Let us hope our bank regulators read it since instead of regulating so as to maximize the benefit from the boom and minimize the cost of the bust, ever since the Basel Accord in 1988 they have been set exclusively on avoiding the bust and which is clearly unwise.

How long has it been since any bank regulator has asked himself the question of what is the purpose of the banks? It cannot be simply that of avoiding a bank crisis as that is just stupid.

May 08, 2008

But in all this slicing and dicing there is no cube with the fathers and mothers of the US

Sir Jurek Martin in “Do not let Limbaugh pick the president” May 8, says “We are slicing and dicing the great American Community as it has never been sliced and diced before. Every component part is in play – black, white, men, women, Hispanic, Asian, rich, poor, old, young, Protestant, Catholic, evangelical, Jew and non-believer”.

To this we would then also add the slicing and dicing that the US Census Bureau does when reporting on the characteristics of citizens who voted or not in the elections and which, to Jurek Martin’s components adds: Nativity Status (whether born in the US or naturalized), Marital Status, Educational Attainment, Employment Status, Tenure (whether they own or rent the house), Duration of Residence at the place where they now live, Veteran Status and the Region where they originally come from.But surprisingly, at least to me, no one seems to be interested in the cube represented by fathers and mothers! Since the backbone of a nation is its people and the backbone of its people is God and families one has to wonder whether someone is taking the US backbone for granted.
Please visit!

May 07, 2008

The bankruptcy of the finance sector regulations

Sir Martin Wolf lists a quite comprehensive “Seven habits that finance regulators must acquire” May 7, though I missed two things.

The first is a definition of what we should have the right to expect from the regulated financial sector since hopefully it must be something more than just for it to avoid defaults. And how can you regulate without an objective?

Second, when Wolf mentions that “Capital requirements must be the same across the entire financial system, against any given class of risk”, this is way too important to leave at that, since it signifies that the fundament basis for all current Basel regulations, namely minimum capital requirements allocated on the basis of risk of default alone, has proven to be a bankrupt concept; with in this case “bankruptcy” being an unusually appropriate term.

By tinkering with risk and forcing upon the markets the “opinions” of the credit rating agencies overall societal risk has only increased and this has to change. Basel, do not go forward to Basel II or III, go back to the drawing board altogether!

May 02, 2008

Don't forget to sack some regulators too!

Sir William Cohan writes "Regulators must seize the chance to reform Wall Street", May 2, and though I agree with most of what he says I can't help thinking that we must also seize our chance to reform the regulators before they take us to That-Place-That-Must-Not-Be-Named.

Our bank regulators have now for two decades forced upon us a system which sole objective has been to avoid financial turmoil, as if that is all that banking is about, and they have not even delivered on that!

Come on, that the bank regulators should get sacked when they do not perform must be the first pillar of any reform. This is turning out to be the mother of all the non-accountabilities.

We also need to review "normality"

Sir it is understandable to wish for a return to normality as could be read from your "No quick end to the credit squeeze" May 2, but one of the very few good parts with any crisis is the opportunity it brings to reappraise whether we agree with "normality". This is a moment to step back and have a long deep thought of what we really want to get out from our financial sector and from our banking regulations, since just keeping us out of turmoil is clearly neither enough nor deliverable.

Just because they are private doesn’t make the credit rating agents less bureaucrats

Sir John Authers in “The Short View” of May 2 asks the relevant long term question “should the S&P’s ratings be this important”, and answers with a no “As we have learnt from the credit crisis, it is dangerous for so many to put so much weight on one rating agency’s judgment”. He is right. The fact is though that as long as the regulators keep empowering these agencies to decide so much on how much capital the banks have to set aside for each credit based on the ratings, too many will indeed put too much weight on one rating agency’s rating, and there is no way around it.

I just ask what if those credit rating agents had worked for the regulators. All hell would have broken loose. Our confusion arises from not being able to see through the veil that the outsourcing to the private sector signifies, so as to comprehend that the credit rating agents are just simple credit-risk-measuring-bureaucrat-commissars.

May 01, 2008

Risk is always relative!

Sir, John Gapper titles a bit prematurely "The return of high-risk optimism" May 1, when in fact we are yet only going through "the coming home of low-risk pessimism" phase; and in fact he mostly discusses the losses on "safe securities".
What is finally true is that risk itself is a very relative concept and I have argued for years that while all those low risk instruments could be truly low risk instruments from a financial investment perspective, they could just the same be the most risky investment from a long term societal development point of view. For instance the "safe" financing of cars placed in the perspective of the climate change threats.