January 30, 2009

Anything you can rate I can rate better!

We have just been served proof of how dangerous systemic risk are was when the regulators induced the world to follow the advice of some few credit rating agencies; and millions will lose their life savings and millions could even die as a direct consequence; and now Lasse Pedersen and Nouriel Roubini propose to dig us even further in the hole we are in with their “A proposal to prevent wholesale financial failure” January 30; where they suggest to adjust the capital requirements of the banks by rating their systemic risk. What Gods do they think they are, believing they can fully understand systemic risks and that their interference on a lower level would not alter the system and produce even much more advanced and dangerous systemic risk?

From the start I was opposed to the bank regulations emanating from Basel suspecting that these could easier lead us to something bad than to something good, but on this proposal I just know it to be so. Please… can we go in the other direction of simplifying how we regulate, so that we all understand more what we are doing?

January 29, 2009

Is George Soros long on oil from Texas?

Sir George Soros in “The game changer” January 29, instead for advocating for a tax on the gas at the pump so that the gas is used less and other energy sources can compete better, he argues for an outright protectionist duty on oil “to keep the domestic price above, say, $70 per barrel.” Is George Soros long on oil from Texas?

January 28, 2009

Governments and politicians should feel much less smug.

Sir Martin Wolf shows us to be between a rock and a hard place in “Why dealing with the huge debt overhanging is so difficult” January 28. On one hand “liquidation” and bankruptcies would result in a depression and so “that option must be insane” but if, central banks are aggressive enough, we would “relapse into inflation [which] would be a huge policy failure”.

What are we to do? Just the realization of where we find ourselves is a better place to start. That way at least we will have a chance to avoid the push to spend and stimulate massively and fast, no matter how, and begin to behave more rationally in terms of the implementation so as to get the most effective stimulus of sustainable growth out of every cent of new public debt invested; and in terms of thinking about the taxes that will be needed to pay for it all.

But to have any chance to get it right we also need governments and politicians to stop feeling so smug about the current interest levels and to think that markets are brimming with confidence in their actions. If we disregard what markets are paying in premiums for access to a temporary safe haven in the midst of an initial confusion, many sovereign public debts might have already surpassed their long term sustainable levels.

Money, money, and money.

Sir Jeffrey Sachs is absolutely right when in “The Tarp is a fiscal straitjacket”, January 28, he urges for a “sound medium-term fiscal framework”. Since the markets quite often even when such a framework is spelled out do not believe in it, they have their statistically valid reasons for that, can you imagine how spooked they could get when asked by the stimulators to join a spending crusade without even hearing a word on taxes?

Indeed, since taxes seem to have reached a real low point in terms of credibility, having lost so much of their real progressiveness over the years, the first thing to do is to make a careful inventory of the supplies and to figure out how to get them to the troops, in time. As Prince Montecuccoli taught “To wage war, you need first of all money; second, you need money, and third, you also need money.”

What freewheeling?

Sir Gillian Tett in “Bankers and bureaucrats seek a new philosophy” January 28, she mentions that “Western Governments… know they cannot return to the type of freewheeling world seen earlier this decade. What freewheeling is she speaking about? As far as I can see the current crisis is the direct consequence of the financial capitals having been concentrated so as to travel overly relaxed on some rigid AAA-tracks which led them over a precipice. I am absolutely sure that if capitals had really been freewheeling nothing like this sort of horrendous systemic crisis would have occurred.

January 27, 2009

Desperation is indeed a bad counsel

Sir Peter Boone and Simon Johnson make a proposal for how to re-privatise the de-facto nationalized banks by means of the government receiving and selling warrants which would allow new private equity and shareholders to step in at a more reasonable fiscal cost. To save the banks we must stand up to the bankers, January 27.

That could be, though I remember that one of the reason for the successful Chilean recovery after their bank crisis was that the old shareholders were given a repurchase option, at a price that compensated the government of which I believe many have already been executed.

What I do take exception from is when they express that one of the problems is that the banks would refuse to sell their assets and so “the regulators need to apply without forbearance their existing rules and principles for the marking to market of all illiquid assets. The law must be used against accountants and bank executives who deviate from the rules on capital requirement.” Are they going berserk? Desperation is clearly a bad counsel. Their intention sounds like forcing everyone who owes more on a house than what it is worth to have to walk away from it even if he is willing to stay. Besides, what does market value really signify when markets do not exist?

Actually the truth is that to save our banks we must first stand up to our financial regulators and who are, without doubt, the first to blame for this crisis.

January 23, 2009

The government needs to provide venture capital for new banks.

Sir George Soros discusses “The right and wrong way to bail out the banks” January 23, as if bailing out the banks was our problem. We need to bail out our economy and if doing so we happen to bail-out the banks, great, if not hard luck.

At this moment we have a regulatory system for the banks that by means of the minimum capital requirements prioritizes risk avoidance. What we need instead is a regulatory system that helps us assure that the banks prioritize what is most needed.

In this respect, with government funds, I would create many new banks, with a fix capital requirement for any credit, for instance 6 per cent, and I would nominate a series of management groups to run these banks giving them the incentive of a generous purchase option for the bank in a couple of years, and asking for a secured indemnity in case of any particularly irresponsible act committed by any of these manager.

Also if these banks want to buy “toxic assets”, because they believe it is in their interest to do so, the better.

Sir I guess that it most probably must have been a very long time since George Soros walked down any Main Street.

The rating agencies credibility is not a result of any market

Sir Paul De Grauwe is right suggesting to alert the investors with a label that says “Warning: rating agencies can do you harm” January 23; as you know I have been advocating precisely that for years. But, when De Grauwe expresses surprise that the rating agencies are still around, even after having failed so miserably, he forgets that who put them in power and keep them there were the financial regulators and not the market. As long as “if they’re good enough for the Basel Committee they’re good enough for you” reigns, the markets cannot free themselves from these dangerous agents of systemic risk.


January 22, 2009

Geithner could be heading onto the wrong direction.

Sir FT reports quite extensively on the confirmation hearings of Timothy Geithner, the Treasury nominee held by the US Senate’s Finance Committee on January 21. Though he did not give away much on what he will do I cannot say that I disagreed with most of what he said… it all sounded so reasonably. But given that we do not live in reasonable times what most interested me was whether he possessed the type of deep-core beliefs or philosophy that helps anyone to stand firm against the storming winds, and I must confess I felt somewhat disappointed.

When Geithner referred to the credit rating agencies he mentioned they were guilty of “systematic failures in judgement” but he did not say a single word about the regulator’s fatal mistake when empowering the credit rating agencies they created the systemic risk bomb that was bound to explode, sooner or later, as it sure did. Anyone who at this moment might be inclined to dig us even further down in the regulatory hole we’re in is someone that I cannot feel truly comfortable with.

It might neither be time for an international symphony orchestra

Sir you hold that a global financial crisis requires global co-operation and therefore it is “Not a time for a one man-band” January 22. But, whether we are able to stimulate the right kind of projects that will serve sustainable growth, or hand out the most efficient tax-rebates that produce the most suitable demand that will all, at the end of the day, no matter how much international cooperation there is, depend almost exclusively on the very local capacity to implement. Of course it cannot be a one-man band; it has to be a very well rehearsed local symphony orchestra.

I cannot refrain from reminding you again that I bet my last shirt on that we would all have been better off without that international cooperation called the Basel Committee. Of course “no country will escape this storm on its own” but that is no valid reason to jump all in the same life-boat. That each country while implementing their own rescue plans needs to consider the international implications carefully, that is a totally different question.

Having considered the Financial Times a defender of free financial markets, by which, just in case, I do not mean unregulated markets, I find it somewhat bewildering to see it championing global financial central planning. Should we not better reserve that for the fight against climate change?

The nuclear bridge

Sir whether sturdy or weak, safe or dangerous, short or long, no matter how we look at it the nuclear energy is the best and perhaps even the only bridge available to take us from a carbon driven to a clean renewable energy driven world.

In this respect I do not harbour any of the concerns that Oleg Deripaska expresses about the current drop in oil prices or the financial crisis delaying the development of a nuclear response to the world’s energy, as long as we can convince regulators that it is high time for them to roll up their sleeves and work 24-7-365 to speed up without running of course, whatever due diligence procedures are needed, “A nuclear response to our energy problems” January 22.

If you ask me what would be one of the best stimulus packages we could come up with, dollar for dollar that would be to double or triple the budgets of entities such as the U.S. Nuclear Regulatory Commission… and then crack the whip.

Mr Jouyet cannot have the cake and eat it too

Sir as reported by Paul J Davies in “France demands stronger ratings supervision” January 22, it looks like Mr Jean-Pierre Jouyet, the French regulator strives to have the cake and eat it too. On one hand he wants to increase the supervision of the credit rating agencies and so which presumably would make them more “trustworthy” for all to follow and on the other hand he “wants to see the role of agencies in the financial system reduced.” He needs to make up his mind. May I suggest he concentrates on the latter alternative as the first would only risk digging ourselves deeper into the hole we’re in.

January 21, 2009

Let us pray it is not too late.

Sir Peter Thal Larsen reports January 21 that the “UK regulator helps to ease the pressure” lowering the capital requirements for banks when at the “low point of the cycle”. Not a minute too late.

Requiring higher capital when already awarded credits are being discovered to be more risky than previously thought, and allowing lower capital when credits could be perceived to be less risky, is one of the fundamental ways how the financial regulators that were responsible for the Basel framework created and leveraged new cyclicality for the world to suffer. Shame on them!

Listening to their “we did not know” is just the reason we do know that bank regulations must not be allowed to remain an exclusive and reserved affair for bank regulators.

Let our bankers become bankers again.

Sir Mohamed El-Erian says “We have to bring the banking sector back to life” January 21, because “Banks play an important role in any economy…efficiently channelling funds to productive uses”, and I believe he is even more right than he is aware of.

For years I have been arguing that our banks need to rescue the role they should play in the economy and which they lost when they were ordered by means of the minimum capital requirements based exclusively on risks, imposed on them by the regulatory authorities in Basel, to be risk-adverse entities and basically automated arbitrators trying to capture whatever spread existed between what the market was requiring in interest rates and what it should charge in accordance to the credit rating agencies opinions on the inherent risks.

Yes, now, more than ever, we need our bankers to become bankers again, and to regain the capacity of looking their clients in their eyes so as to explore on behalf of the society all the avenues that exist for the creation of decent jobs and sustainable economic growth. It is absolutely not too “late to stop banks becoming utilities”; for the simple reason that we cannot afford to let them.

Obama has more than enough on his own plate

Sir Martin Wolf is right blaming an absolutely excessive consumption gap between deficit countries led by the US and surplus countries led by China for the ongoing implosion, now when the music stopped, and that therefore it is not only the US’s responsibility to provide the fixes, “Why President Obama must mend a sick world economy”, January 21.

I would go even one step further. When Wolf mentions that “much of the expansion is expected to come from the US Federal Budget” we should not, even for a second, “leave aside the question of whether this will work”, knowing, as Wolf says, that the “US cannot run fiscal deficits of 10 per cent of GDP indefinitely.” In this sick world economy, one of the few healthy spots that remains is the dollar, curiously the representative of the leading deficit country, and to keep the dollar healthy should be one of Obama’s prime responsibilities.

Anyhow anyone that stops looking at yesterdays statistics and walks the main streets, in real time, will soon come to the conclusion that whatever “good” the fiscal expansion might bring to the USA, pardoning financial losses, reducing excess inventories, financing private savings, making the local adjustments easier, a sustainable USA expansion does not carry sufficient punch to assist in keeping up any significant consumption disequilibrium, and so the adjustments now going on in the surplus countries must, unfortunately, be absolutely brutal. That though cannot be Obama’s prime concern; he has enough on his own plate. In other words, the world cannot afford the US drowning while trying uselessly to save it. “Healer heal thyself”, comes more readily to my mind.

Finally, Wolf rightly mentions that “more of the world’s surplus capital needs to flow into investments in emerging countries” but for that to happen the financial system requires two reforms that have to take place in Basel. First to take away the power of agencies to set up AAA directions signs and that will by sheer inertia always tend to guide capital to status quo economies; and second to eliminate the current formula of minimum capital requirements for banks based on risks and that places an additional tax burden on those risks that are more prevalent in emerging markets. Those two reforms are in my mind more important and urgent than the also much needed IMF governance reforms that Wolf focuses his attention on.

January 19, 2009

How do we get better regulations with the same not-accountable regulators?

Sir Frank Partnoy holds that “It is ironic that credit rating agencies still retain such power. They were a significant cause of the crisis. They helped fire the fatal bullet by giving unreasonably high credit ratings to ´super senior´ tranches of subprime mortgage-backed collateralised debt obligations. It is astonishing that their views would matter to anyone at this late date. Yet government regulations continue to rely on ratings.”, “Prepare to bury the fatally wounded big banks” January 19.

Indeed it is ironic, even outright disgraceful, and the only explanation for it must be found in the total lack of accountability of the financial regulators. These regulators are now conveniently shielding themselves behind all those calls for more regulations, and which become so hard to explain if one is forced to accept the fact that there is such thing as bad regulators.

Eurozone prayers!

Sir Wolfgang Münchau describes the Eurozone as resilient enough to handle a sovereign debt crisis scenario thinking that “a full-fiscal union would be more probable than a break-up”, “What if´ becomes the default question”, January 19. Unfortunately, when he argues that “if Germany, for example had such an incentive to leave, it would almost certainly forgo that perceived economic benefit and stay for political reasons” he enters the land of hopeful wishing. How does Münchau manage to ignore that “perceived economic benefit” represents precisely one of the strongest political reasons?

From the beginning I have always thought of Europe going into a monetary union without being a true political union as quite an adventurous proposition but, to have an economic crisis to lay the ground for a political reunion, sounds much more like believing in miracles. Anyhow, I agree, let us pray for a miracle.

In taxes we need to start from scratch.

Sir I certainly appreciate Clive Crook’s “Four fixes for America’s fiscal fiasco” January 19, since the very first thing that came to my mind in this crisis was a… how are we now going to pay for it all? … especially since taxes have lost so much credibility around the world that they are even described more and more solely in terms of growth inhibitors.

In order to regain their credibility the taxes have to be of a progressive nature; they have to stop being overly targeted at the salaries in the formal economies; and they have to be aligned with new global realities. The only way to achieve a tax system that fulfils those criteria is by means of a sincere non-partisan cooperation that is allowed to reconstruct the whole tax systems… from scratch. In the US as in many other countries there is no way of making much sense out of the existent voluminous and confusing tax-codes.

January 17, 2009

How we now wish the regulators had let things be!

Sir no one would contradict Chris Giles’s opinion that “Regulation is small price for protection from another crunch” January 17, the question is though… what kind of protection? … could we not make it worse?

In this respect, to all those who believe that the more intrusive these regulations are the better, let me remind them that not long ago our financial regulators made a choice between the following options:

a. To leave things as they were, with the same capital requirements for banks on all credits, which if 8% meant a maximum 12.5:1 leverage; allowing the banks to keep taking their own credit decisions without having to look over their shoulder at what the credit rating agencies opined or,

b. To impose on the banks a formula of minimum capital requirements based on “risk”, as the regulators understood risk to be, and which for instance for corporations with a AAA ratings required only 1.6% of capital which allowed for these credits a 62.5:1 leverage; and forcing the banks to heed the opinions of the credit rating agencies sending out the message of “if these official risk-surveyors are good enough for the bank regulators then they are good enough for the banks”.

The regulators, sadly, unwisely, chose option b…how we now wish they had not changed a thing!

January 16, 2009

It is not a question of stimulus against public investments.

Sir Joseph Stiglitz pleads “Do not squander America’s stimulus on tax cuts” January 16 preferring the investment in infrastructure. The issue is wrongly phrased, it is not a question of either or.

If stimulus one needs to make certain that these go to those who provide the most effective demand creation in sustainable sectors; if infrastructure these have to create employment in the short term and serve as support for long term sustainable growth.

But, whatever alternative is chosen, there is a need to follow sound implementation principles. For instance, in infrastructure projects and in order to guarantee ownership, these should be proposed by the States municipalities or even private corporations; for transparency these should be approved by a public committee after a brief evaluation of the projects on what they offer in terms of jobs and sustainable growth; and, finally, for accountability, the projects should only receive the funds in strict pre-specified terms and conditions, cash on delivery.

January 14, 2009

Whatever, but please pull out the aching tooth fast!

Sir Martin Wolf is absolutely right when he indicates that the window of opportunity for the USA to be able to sort out all that it needs in order to reassume economic growth of a hopefully more sustainable kind, before they hit the roof of unacceptably high levels of debt, is short, “Why Obama’s plan is still inadequate and incomplete” January 14. I would hold it to be very short.

It reminds me of a letter that I wrote to the Editor and that you published in August 2006 on “The long term benefits of a hard landing” and where I argued “that the gradualism of it all could create the most accumulated pain.”

The letter said “Why not try to go for a big immediate adjustment and get it over with? …. This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation… Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom, in a couple of decades.”

January 13, 2009

The Fed Reserve needs many strong helping hands in order to prevent a dollar rout

Sir Mansoor Mohi-uddin gives us a “Five point plan for Fed Reserve to help prevent a dollar rout” January 13 and we do appreciate the intentions, especially since for the time being the undisputable role of the dollar in the international system represents much of the stability there is left in it, and we shiver to think what would happen if that pillar would yield.

That other countries will go down the route of quantitative easing and therefore “there will once again be no major alternative to the dollar as the world’s reserve currency” is, in any such scenario, of little consolation.

But the defence of the dollar is not solely a Fed responsibility. Sooner or later the market, in these days when the only thing it hears are on tax-rebates and stimulate-until-you-drop plans, will expect some indications as to how the American tax payer intends to help to pay for it all. Much as it hurts me since I come from an oil producing country an announcement of a dollar plus new tax per gallon of gas in the US would do a lot more to prevent a dollar rout than all the squirming of the Fed Reserve put together.

January 09, 2009

Send out the dogs!

Sir Aline van Duyn does very right reminding us that “Messy question of toxic assets still needs an urgent answer” January 9. There must be without any doubt some value in those assets and besides, in these circumstances of uncertainty, even knowing for sure they’re worthless could have some value.

I remember having heard about the possibility of the US government empowering some financial experts to go out and hunt down the value of the toxic assets and paying them a percentage of the bounty. What happened with such a splendid idea… too republican?

Do you belong to an unkown sect of Austrian economists?

Sir in “A plan to spend – and to pay it back” January 9 you admonish that “Congress should not commit themselves to fiscal consolidation too soon”. Are you joking? Don’t you know Congress is composed by politicians?

Also I cannot understand why you egg on the announcement of even larger stimulus packages knowing that these will come, in due time, if there is room for them. Could it be that you belong to a sect of extreme Austrians economists that want Obama to spell out the real figure so that the markets are spooked right away from believing the dollar is a safe haven?

January 08, 2009

Indeed what would Keynes be saying?

Sir we must be grateful for Peter Clarke’s very enjoyable “In the long run we are all dependent on Keynes” January 8, not the least for the timely reminder that “the General Theory had advocated regulating economy through investment, not consumption”.

It would be interesting to speculate about whether Keynes would have repeated his “I was the only non-Keynesian there” if witnessing how his name is now used to support the build-up of US public debt in order to create bailouts and stimulus packages to save the world from a monstrous depression, given the extremely high stake of said debt becoming so unsustainably large to cause the mother of all meltdowns.

Between the opinions of Vaclav Klaus and Kevin Rudd I am all for the first

Sir Kevin Rudd the Australian prime minister holds that “Leaders must act together to solve the crisis” January 8, because “Fragmented responses could yield to policies that run the risk of accelerating rather than ameliorating the crisis”. This is a bad argument since there is very little to assure us that a coordinated official response would not do exactly the same.

For someone like myself who for years now have fought the efforts of regulators to impose a coordinated global oversight on risks by using some few credit rating agencies it is clear that I prefer the much humbler attitude in reference to the value of government interferences expressed yesterday by the President of the European Union Vaclav Klaus in “Do not tie the markets – free them”.

January 07, 2009

The US, sooner or later, has to start paying for what it consumes.

Martin Wolf in for “Choices made in 2009 will shape our destiny” January 7, describes very accurately our starting point saying that “relying on vast US fiscal deficits and expansion of central bank credit is a temporary – albeit necessary- … will not deliver a durable return to growth. Fundamental changes are needed”. Wolf also points out the problem of the “persistent external and internal imbalances in the US and the world” that result from the US and a number of other chronic deficit countries” having “structurally deficient capacity to produce tradable goods and services.

Unfortunately, after such a clear diagnosis, Wolf proceeds hinting at the need of even higher fiscal deficits without giving much clues as of to what those required fundamental changes could be; and so let me then suggest one truly fundamental change, that of the US starting to pay for its own spending spree instead of having the world finance it.

One aspect conspicuously absent in the discussions is the need for the US to come up with a new generation of taxes that are appropriate to the current conditions and that work in a globalized setting. One type of these taxes, namely a tax on gas, has at least started to be discussed in Washington.

Absent the willingness of the US to pick up the bill for their own consumption, they might buy themselves some time if China buys up a million of houses in the USA so as to get some more real backing for their dollar investments; and which by the way would also be a great alternative for China to get the US economy going again for the benefit of their own business model.

As I see history playing out its ironic hand housing finance created a perfect storm which forced everyone into the safe harbour of the US treasuries, until it got so crowded there that everyone started swimming again to the house-wrecks.

Viva the President of the European Union!

Sir though I do not agree with his laisser faire attitude towards the climate change I must express my deepest thanks to Vaclav Klaus for giving reason a voice and blaming the “immodest and overconfident politicians playing with the market” for the current economic crisis, “Do not tie the markets – free them” January 7.

His words remind me of those uttered by the Joker (in the name of the free market) 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. 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 silly formulas of minimum capital requirements for banks based on some vaguely defined risks of default; and thereafter creating a risk information oligopoly empowering the credit rating agencies and which doomed, sooner or later, the world to be guided over a precipice of systemic risks; like what happened with the lousily awarded mortgages to the subprime sector, I cannot but shiver when I hear about giving even more advanced powers to the schemers.

January 06, 2009

Still… all we need is love!

Sir you argue that “bereft of ideas even after a cataclysm for capitalism that there is a need for “Reinventing the European left” January 6.

In a world where everyone now needs to take some time out and refocus, even you, is it not a bit arrogant to single out just one party as being in need of reinvention?

Also, does “All we need is reinvention” really substitute for that old “All we need is love”… I don’t think so.

No sir, it is not the individual citizens responsibility to help the society to spend itself out of the mess.

Sir you write “Saving the savers is not the priority” January 6 and, in that, you are right. But then you go on saying “This is surely the right time to encourage people to spend, spend, spend” and, unless you are yourself doing that and giving exactly the same advice to your own children, this is a shameful thing to say.

Yes it would be lovely if all consumers by magic fully recovered their confidence in the economy but while the economy is not showing a clear direction of where it is going the individual responsibility of a citizen that a country could be proud of, is to save, save, save… even if not for any other purpose than to have the money to pay, pay, pay for all the taxes that will come.

Franchising is also a valid way of de-leveraging

Sir I read with interest Jonathan Birchall’s report “Borders hopes new chief can improve its story” January 6.

These mega chains, like Borders with 1,000 stores in the US, and that must have driven out of business a lot of small bookstores are clearly a result of an era where financial leverage was king. Perhaps the tide is now turning and so perhaps one financial value creating way of de-leveraging for a Border is to franchise out their operations to 1,000 individual franchise owners. One would at least hope this alternative is considered before there are further store consolidations that could leave us buyers and consumers with no leverage at all.

No way!

Sir Andrew Large as a former financial regulator should be ashamed of his “Central banks must be the debt watchdogs” January 6 by which he wants to dig us even deeper into the hole we’re in.

He wants to construe “the necessary architecture and instruments to produce a more effective response to the build up of systemic pressure” ignoring that this itself could lead up to other systemic risks just as the regulators appointment of the credit rating agencies as their risk watchers led most of the market to focus on what these gorillas were doing and therefore never seeing all that was happening around them.

Let me be absolutely clear central bankers are incapable of scrutinizing systemic risks since that would require them to start scrutinizing themselves as the biggest source of systemic risk.

And what if China buys a million houses in the USA?

Sir David Hale follows a quite plausible story line in his “There is only one alternative to the dollar” January 6 but he arrives to the wrong conclusion. Clearly if the confidence in the dollar drops demand for gold could go up but it is really hard seeing gold reassuming in today’s world its traditional role in backing currencies and many other developments, no matter how crazy, might be in store for us.

For instance what if China decides to buy one million of the actual stock of American houses to better guarantee their somehow shaky dollar exposure and to prop up the US housing market that was a main pillar in a business model that seemed to be working quite well for them?

January 05, 2009

The original sin was ignoring the purpose of our banks

Sir John Plender titling the “Originative sin” January 5 has the late John Kenneth Galbraith opining that “finance and innovation were fundamentally incompatible”. What Plender implies is wrong. If anything can be labelled as the original sin it is not the financial innovations but the fact that for some decades now there has been little or no discussion of what is the purpose of our financial system and most especially that of our banks. Of course we expect the banks to be safe mattresses for our savings but that is far from all they are supposed to do and clearly, any financial innovation, should be evaluated with a reference to its purpose.

Just the same Galbraith, in “Money: Whence it came, where it went” (1975), addresses the function of banks in the creation of wealth by speculating on the fact that one of the basic fundamentals of the accelerated growth experienced in the western and south-western parts of the United States during the past century was the existence of an aggressive banking sector working in a relatively unregulated environment. Galbraith mentions that banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing. May I ask… what wake of development has the financial sector left lately?

We left the regulation of our banks in the hands of a regulator who only had the safe-mattress purpose on their agenda and that is why the saddest part of this current crisis is the little sustainable development the last boom-bust cycle has produced. All the recent bank regulations created in Basel were oriented towards the goal of avoiding individual banks to fail while completely ignoring the much larger risks that banks would fail to do what we truly expect them to do.

January 03, 2009

Austrian surgery or Keynesian chemotherapy?

No Sir FT should not get away answering “Is your recession really necessary? January 2009 by painting a simplistic picture of some evil Austrian forces wanting to castigate the world by dragging down the economy into the doldrums of a severe and disciplining recession and an enlightened Englishman who understood that “in a crisis, demand would not necessarily fall back to the sustainable level”. What is happening is much too serious for that.

Our current alternatives are more like having to choose between Austrian surgery and Keynesian chemotherapy. Only as an example I would much prefer to cut out all the financial fatty tissue that was created like by magic when the subprime mortgages moved up to the Triple-A world, than use a general chemotherapy that can leave us so weak with masses of public debt and that could have us fall into a final coma.

Having said that, before any type of intervention, the patient needs to recover the will to live and that depends on us being able to explain to him in a credible way the full extent of his illness and its treatment. As an economic doctor I would start telling the patient about the sacrifices he will have to make, for instance the higher taxes he will have to pay, because the whole story of stimulus packages, tax rebates and expecting rational behaviour modification from the same financial regulators that got us into this mess, sounds too much of a tall tale to inspire any sort of confidence.

If I was Obama I would in the first 100 minutes of my presidency use my political capital to announce a one dollar per gallon of gas tax. That would absolutely sting a lot but that would also help the patient to believe that there is a rational way out and that someone is willing to go down that path.

January 02, 2009

Certainty is a source of much worse systemic risks than uncertainty

Sir Sheila Dow in “A strong argument for pluralism in economic reasoning” January 2, writes “Predictions in times of particular uncertainty can shift dramatically… with serious consequences”. She is right but let us not forget that times of particular certainty like those when everyone from the regulators, the sophisticated investors and the small investors believed in the credit rating agencies generate even worse systemic risks.

If we cannot guarantee pluralism let us at least combat monism