March 31, 2014

Democracy goes way beyond the 1% vs. the 99% debate.

Sir, I agree in much with what Edward Luce puts forward in his “America’s democracy is fit for the 1 percent” March 31 but, the issue of undue influence in a democracy, goes much further than the simplistic 1% vs. the 99% debate.

For instance I hold the view that corporate taxes should be zero, since only citizens should be able to wield the influence of paying government bureaucrats their salaries.

And also that 1% too often seems to imply that all those in the 1%, like in the 99%, are alike which we know they aren’t. For instance you would not want to tax the wealthy in order to further benefit the oligarchy, or do you?

Instead of QE, why not an ECB cheque to each European?

Sir, Wolfgang Münchau comes strongly out in favor of a quantitative easing program of well over $1tn… among other “to get banks to sell assets to the ECB, the proceeds of which they would use to lend to companies”, “Central bankers talk far too much and act to little” March 31.

I wonder, with current risk-weighted capital requirements for banks, would that lending to companies really result in a for the real economy efficient way? It would not! For that, better than QEs, is to get rid of those entirely unmerited regulatory distortions against the access to bank credit of “the risky”, medium and small businesses entrepreneurs and start-ups.

And since lately there has been quite some outrage over the unequal distribution of wealth, should we not consider that QE’s, the way they have been designed, are really drivers of inequality? In that case, why not a cheque to every European instead, and then take it from there? Please don’t let anyone fool you, ECB, by buying specific type of assets, is handing out lots of free cash to some few.

Europe needs energy, indeed, but more than electricity human energy, that which is propelled by risk taking.

Sir, Leif Johansson, the chairman of Ericsson and Astra Seneca, when urged by the FT to pick out one issue that needs to be addressed to make Europe more competitive, suggests: “energy; both security of supply but also energy competitiveness especially versus the US”, March 31.

I would agree but, instead of energy represented by electricity, which is what Johansson refers to, I would argue for the need of more human energy… that which is driven by the willingness to take risks.

That human energy is currently being killed by regulations which allow, in Europe more than anywhere else, banks to earn higher risk adjusted returns when lending to the “infallible sovereigns” and the AAAristocracy, than when lending to the “risky” medium and small businesses entrepreneurs and start ups.

Leif Johansson should remember that in the churches of Sweden psalms were often sung imploring “Gud gör oss djärva”, “God make us daring”.

Right now banks in Europe are not financing the risky future, they are just refinancing the safer past… and that Europe, is no way to go.

March 30, 2014

Believing too much in “the power of peace” can be hazardous to the health of your nation.

Sir, I refer to Simon Kuper’s “The surprising power of peace”, March 29.

It is always better to be skeptical and pleasantly surprised by “the power of peace” than naïve and unpleasantly surprised by its weakness. Most Venezuelans, including most of those who strongly protested the previous ways of Venezuela, and thereby perhaps unwittingly helped to open the way for Hugo Chavez, stand today in utter disbelief watching how everything has degenerated. I cannot but reflect on how much better off we could have been if we had believed much much less in “the power of peace”.

And I say this also in reference to George Osborne and Wolfgang Schäuble now recommending a “balanced and proportionate” response to Russia. That sounds a bit like believing too much in “the power of peace”.

How do we rein in runaway obsessions with data, like that of the Basel Committee?

Sir Tim Harford’s article “Big mistake?”, March 29, is just great.

When Harford mentions that “Google’s own search algorithm moved the goalpost when it began automatically suggesting diagnosis when people entered medical symptoms” he refers to the problem of knowing whether the data one looks at is original or is data which has resulted from the looking.

In other words when acting upon the data one interferes with the data. That is for instance what happened in the case of the Big Basel Committee Mistake.

Regulators looked at credit ratings and decided that when these were excellent, banks needed to hold less capital, and so banks then made higher risk adjusted returns on equity, and so the banks naturally rushed in to increase their holdings of these assets… so much that these assets very fast became very dangerous to the banking system as a whole, as in the case of AAA rated securities and Greece.

That to me was perfectly clear would happen when in January 2003 FT published a letter in which I said: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is.”

Unfortunately since there is still little data that shows regulators have fully understood the problem, I wonder how Harford or anyone else suggest we reign in the runaway obsessions with data.

March 29, 2014

When and if taxing the wealthy, because of inequality, remember that governments are part of the problem.

Sir, Thomas Piketty proposes to “Save capitalism from the capitalists by taxing wealth” March 29, and of course there’s nothing wrong with those having the most in society carrying the heaviest load… especially when it comes to finance opportunities.

But, as Piketty also admits, much of the reason for the growing unequal capital is that “the political process [is] so tightly captured by top earners”… and so governments are part of the problem, and can therefore not be trusted with efficiently distributing those revenues.

For instance, if the purpose is to fund education, I can think of many systems whereby funds from the wealthy can go directly to pay for the costs of less wealthy students, with no one getting their hand in the tilt for political or other purposes.

In other words, when redistributing economic wealth, we must make sure we are not increasing excessively the might of wealthy governments, since that can create and even worse sort of inequality, which could endanger capitalism even more.

Personally, before going after the wealthy, I would prefer to tax at a higher rate all those who benefit from special relations… be it monopolies, protected intellectual property or similar… because even in the case of wealth there are some which are better earned than others.

PS. And let me take the opportunity to remind of the need to get rid of that odious opportunity killer, and that odious inequality driver, that risk based bank capital requirements represent… and which of course has nothing to do with capitalism and all to do with regulatory foolishness.

March 28, 2014

On responding to Russia and on Europe’s decline, Churchill and von Bismarck might have differed from Osborne and Schäuble.

Sir George Osborne and Wolfgang Schäuble write about responding to Russia in a “balanced and proportionate way”, “The eurozone cannot dictate Europe´s rules alone” March 28. Is that really enough? Might it not be so that history shows that Europe must respond to Russia in an unbalanced and disproportionate way?

And these two European gentlemen also write that “No one should assume that European decline is inevitable”. No… but it can happen! As long as regulators, with their risk weighted capital requirements allow banks to earn higher risk-adjusted returns on equity when lending to what is perceived as “safe” than when lending to what is perceived as “risky”, its decline is inevitable. In order to have a future Europe must risk continuing opening those risky doors behind which its luck might be hiding.

Sir, do you believe Winston Churchill and Otto von Bismarck would have cosigned George Osborne´ and Wolfgang Schäuble´s article?

March 27, 2014

With respect to increasing bank capital we need banks and regulators to be partners, not enemies.

Sir I refer to Gina Chon and Camilla Hall’s “Fed looks beyond bank’s financial targets” March 27.

As a result of regulators falling for the risk-weights’ trick, banks are now, ate least when compared to pre-Basel Committee history, dramatically undercapitalized. It behooves everyone in the economy to see that capital increased substantially so that bank credit is not unduly blocked.

I have no idea of what the Fed saw in Citibank when performing its stress testing and that caused it to reject its capital plan for dividends and share buybacks, but I do know that if the word “punishment” describes it appropriately, the Fed is on the wrong track.

If the real economy is going to get out of this mess… and it is a mess… the Fed and the banks must be partners in finding lots of new bank capital in a credible way. And bank capital will not be raised sufficiently by mistreating the shareholders of banks… nor by fooling some investors into buying Coco bonds, suspecting the probabilities for these to be converted, are knowingly underrepresented.

In fact the Fed and other regulatory authorities must tread on the issue of Coco bonds with extreme care, less they also be liable for withholding information and misrepresentation. And for this I refer to “Flurry of Coco bonds sends yields tumbling” by Christopher Thompson.

If I buy a Coco today and become converted into a bank shareholder three years from now I guess I cannot complain... but what if that happens three weeks from now?

March 26, 2014

Perhaps Otmar Issing should lower the volume of his preaching to Europe.

Sir, in much I agree with what Otmar Issing writes in “Get your finances in order and stop blaming Germany”, March 26, though perhaps he might not be the best suited to be doing the preaching.

As a former chief economist of ECB Issing should have known that: allowing German banks to lend too much to for instance Spain and Italy, against zero capital, and affecting those German small businesses who do not get credit because when lending to them German banks do need to hold much capital; and which later might cause German bank busts which hurt German taxpayers, could be said being disguised transfers from Germans to Spain and Italy.

When Otmar Issing ends stating “The Eurozone did not fall into a crisis because the initial rules were flawed” he should not forget how flawed bank regulations became, are.

Otmar Issing, for your benefit, here´s an aide-mémoire… Who did the Eurozone in?

$100bn in legal settlements for banks also means $2tn less in bank lending capacity

Sir Richard McGregor and Aaron Stanley write on FT’s first page “Banks hit by $100bn in US legal settlements since crisis” March 26.

If I was a medium or a small business, an entrepreneur or a start-up, starved for bank credit, and if I multiplied that bank capital gone in legal settlements by the allowed leverage implied by in a 5% leverage ratio, 20 times, I would know it means I am $2tn in bank credit capacity further away from having my fund needs satisfied.

If in Europe, with its Basel III 3% leverage ratio, 33 times, I would find myself an even more distant $3.3tn from it.

If Europe (and America) does not free itself from runaway control freaks… game´s over.

Sir, John Kay writes “Regulators will get the blame for the stupidity of crowds” March 26 though what is most urgent in the Western world, so that accountability would mean something is that regulators should be blamed for their own stupidity.

Kay writes “Naivety is as much of a problem as criminality. Most businesses plans read persuasively- until…” Indeed, but rarely have we seen something as naïve as bank regulators who thought and still think that with their trick of risk-weighing the capital requirements, they could produce safe banks without producing dangerous negative ripples in the real economy.

Kay writes about concerns “about the availability of funds to small and medium sized businesses” and holds “The flow of intermediation is blocked by the debris of bank failures”. Wrong! That flow of intermediation of funds is primarily blocked by the fact that regulators require banks to hold more capital against it than against the flow of funds to for instance the “infallible” sovereigns or to the AAAristocracy.

Kay concludes mentioning that there were some institutions which provided “the new P2P lending and equity crowdfunding services… They were called banks.” But, instead of begging for banks to return to what they were, he calls for the regulators to make sure that what´s new should be “operating in a more closely regulated environment”. Frankly!

Let me phrase it the following way. Every time a bank credit in Europe (or America or anywhere else) is not given to a small and medium sized business, only because these cannot provide the banks with a competitive return on equity as a result of higher capital requirements, a door, behind which we could find the luck needed to power our future, has been shut.

March 25, 2014

More than “safer” we need to make our financial system more “functional”

Sir, as an Executive Director in the World Bank, 2002-2004, during the Basel II discussions, with respect to big banks I said: “Knowing that “the larger they are, the harder they fall” if I were regulator, I would be thinking about a progressive tax on size”. 

And, so of course I find Mark Roe’s and Michael Tröge’s proposal of “How to make the financial system safer”, March 25 quite interesting.

That said many questions come to mind.

First, if there is a tax on liabilities, who will pay for it the most, borrowers by means of higher interests, or depositors by means of lower interests?

And, since what equity holders are really out after is high returns on their equity, and these are much obtained through leverage, it would not seem like these taxes would be able to sufficiently substitute for regulations that limits bank leverage.

But the authors also state: “Until now, regulators have largely used command and control mechanisms to make banks safer: requiring them to have more capital, banning or reducing their riskiest activities, and punishing reckless behavior after the fact”. And on that I must comment.

What regulators have NOT done is requiring banks to have more capital to reduce risky activities; what they have done is allowing banks to have very little capital for what was perceived as “absolutely safe” not risky activities… and that is what really has created the big risks.

And so when the authors write that “Banks understandably do not like regulators getting involved in their strategic decisions” it shows they have not yet understood what has been going on.

On the contrary, banks have LOVED regulators for getting more and more involved with their strategic decisions… to such an extent of having even adopted the banks risk models of capital allocation.

No it is we, the not bankers, we who want safe and functional banks, we who do not want the regulators to get involved with banks’ strategic decisions. Let the banks do what they want in order to prepare for any expected risks, and expected losses, because that is truly all they can do.

The regulator’s role on the contrary is to make sure there is some bank capital to take care of the unexpected risks, of the unexpected losses, of the risks of banks not being able to do good strategic decisions, and for that it is almost a sine qua nom, that the regulators stay away as far as possible from the influence of banks.

Right now, as a result of regulators layering their risk perceptions on similar banker’s risk perceptions, we have an unsafe and utterly dysfunctional banking system incapable of allocating credit efficiently to the real economy. And so, before doing anything more creative let us just correct for that.

And also, more than bankers devising “fiendishly complicated transaction to work around the rules”, the reality might be regulators designing innumerable rules for the bankers to work around.

March 24, 2014

What is the use of a perfect banking union among imperfect banks?

Sir, on March 24 you refer to “A highly imperfect banking union”, but leave out what is the most important fact, namely that this union is among imperfect banks. That Eurozone banks and sovereigns remain tightly embraced”, as you subtitle it, has less to do with a flawed union and much more to do with fact that regulators allow banks to lend to the European sovereigns holding much less capital than when lending to other European unrated borrowers.

And such regulations as you should understand, makes it impossible for banks to allocate bank credit efficiently.

FT, you need more journalistic boldness to live up to your motto, “Without fear and without favour”

Sir, again you publish the “Boldness in Business” extra in which you celebrate boldness. And yet you are still not been able to write about that absurdly misguided and extremely dangerous cowardness that has taken over bank regulations.

For the umpteenth time… current risk based capital requirements allow banks to earn much higher risk adjusted returns on equity on assets perceived as “absolutely safe” than on assets perceived as “risky”.

That not only stops banks from giving adequate access to bank credit to those who most need it, like medium and small businesses, entrepreneurs and start ups, but it also guarantees that banks will, against much too little capital, be building up dangerous exposures to “infallible sovereigns”, to “safe” sectors as housing, and to the AAAristocracy.

What is keeping FT from putting forward this matter for discussion” Might it be some lack of boldness among those who so proudly proclaim “Without fear and without favour”?

March 23, 2014

The risk based capital requirements for banks represent a tragic crossroad of history

Sir, I refer to Simon Kuper’s great description of the assassination in Sarajevo which initiated World War I, “The crossroads of history”, March22. He writes that “you want to shout at Franz Ferdinand across history ‘Get out of town!’“ That was the kind o warning that some of us were shouting out when we saw what was coming at us in Basel II.

Really that day when someone came up with the suggestion that banks would be safer by means of capital requirements based on risks, more risk more capital, less risk less capital, and no one in the inner circle that mattered objected strongly enough … that day the world, especially the Western World, took the wrong path at the crossroads of history.

Not only would this regulation severely distort the allocation of credit to the real economy, but it would also make the bank system much riskier, since we know that all major crises have always resulted from, excessive exposures to what was ex ante considered as “absolutely safe”.

It was bad enough having already allowed banks to hold less capital when lending to the housing sector, since this ignored the fact that a house that comes without a job is really sort of a second class house… but then, allowing banks to earn higher risk adjusted returns on equity on what is perceived as “safe” than on what is perceived as “risky”, that really turned it into an outright criminal history changing event.

Kuper with respect to the Bosniche Post’s late edition “You sense a small local paper struggling to cope with the news story of the century”… and I sense the struggle of the Financial Times to ignore the financial story of the millennium!

Kuper also mentions that one of the two assassins who survived jail, Vaso Cubrilovic, has stated “It wasn’t our intentions to cause a world war”. But, Sir, the amazing fact is that those who were responsible for the Basel II AAA-bomb, those who of course had no intentions of causing us a bank crisis in the world, are still allowed to freely shoot down the prospects of jobs for our youth with their “improved” Basel III.

March 21, 2014

Pray the future which gifted minds will prioritize is that of Venezuela, and not just that of the gifted minds, like Cisneros’.

Sir, Gustavo Cisneros holds that “Vatican diplomacy could be Venezuela’s salvation”, March 21. I wonder how much diplomacy he believes is needed to overcome Venezuela’s original economic sin, namely that all oil revenues flow directly to the government coffers. As is, that income currently signifies around 98 % of all the nation’s exports.

Had oil revenues been shared out directly to the Venezuelan citizens and so that the government worked for them and not the other way round, then Cisneros would also perhaps have seen no reason to enter into a cozy relation with the government which has so discredited him with one half of Venezuela. And then Cisneros might not have been in need to prepare these just in case the wind abruptly changes mass marketed editorials.

“Gifted minds that prioritize the future will build consensus”. Indeed but let the Vatican and all of us pray that the prioritized future refers to Venezuela’s, and not just to that of the gifted minds.

March 17, 2014

Europe, a perfect disunion of useful banks, is much better than a perfect union of useless banks

Sir, Wolfgang Münchau holds that “Europe should say no to a flawed banking union”, March 17.

Indeed, I agree, but not so much for the reasons Münchau holds.

Current risk based capital requirements allow banks to obtain higher risk adjusted returns on equity when lending to the safe than when lending to the risky. And that distorts completely the allocation of bank credit to the real economy. And banks which do not allocate bank credit efficiently are useless banks.

And in reference to bank unions, nothing sounds as systemic dangerous than a perfect union of useless banks. Were regulators to make amends for their mistake, then Europe would anyhow be much better off than today with a perfect disunion of useful banks.

March 15, 2014

Sometimes there is even more homeland business going on outside the borders than within.

Sir, Tim Harford writes “The world economy is far more integrated now. Some of this globalization is independent of national borders…”, “The Business of borders” March 15.

Indeed, in 2007 I estimated the earnings of the emigrants of El Salvador working in the USA, to be 67 percent higher than the GDP produced in El Salvador by those who remained in their country.

March 12, 2014

ECB should foremost help to eliminate, not neutralize, the distortions produced by risk based capital requirements for banks.

Sir I refer to Martin Wolf’s “The spectre of eurozone deflation” March 12. In what can be done about that threat Wolf mentions that “the ECB… should announce a longer-tem refinancing operation to unblock the flow of credit to small and medium sized enterprises”.

Sir that indicates that Wolf still refuses to acknowledge the fact that credit has been blocked to these borrowers, not by a lack of funds, but because banks are required to hold more capital against loans to them, and this only because regulators decide these are much riskier than loans to the “infallible sovereigns” or to the AAAristocracy, and feel they have the right to intervene and distort.

Well no, until the horrendous regulatory mistake committed by Basel regulations is fully recognized, and a careful plan out of the imbroglio has been executed... any independent ECB effort to neutralize the distortions could make matters worse.

PS. Sir, You decide whether you want to copy Martin Wolf with this or not. I will not since he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

March 08, 2014

The Basel Committee blocks Machievelli´s historical fortunas, while making our mis-fortunas worse.

Sir, Timothy Garton Ash makes reference to “!historical luck, the fortuna that Niccolὸ Machiavelli calls the arbiter of half of the things we do” "States are born by accident but sustained by ardour”, March 8.

That applies directly to what I have in vain been trying to explain to FT for so many years now about what is wrong with current bank regulations.

Capital requirements which allow banks to earn higher risk-adjusted returns on equity when lending to the “safe” than when lending to the “risky”, effectively blocks the access of bank credit to the fortunas the real economy needs to grow and remain sturdy, while at the same time guaranteeing that if a huge mis-fortuna happens, like when an “absolutely safe” suddenly turns out very risky, banks will not have the capital to defend themselves with.

I am sure future historians will write about the period when the Basel Committee castrated our banks and with that our economies, and the elite like the Financial Times kept mum about it.

And what if the captain of the Titanic had unwittingly directly set the course on an iceberg?

Sir, I refer to Tim Harford’s “Let’s have some real-times economics” March 8.

Let’s suppose we have parents who like cookies and chocolate and dislike broccoli and spinach so much they want to make certain their kids eat cookies and chocolate and stay away from broccoli and spinach.

And so, ignoring that kids already share their taste preferences, they reward their children with chocolate if they eat cookies and punish them with spinach if they eat broccoli.

And of course the result is their children grow into a generation much more obese than their parents who, in their younger days have been told to eat broccolis and spinach too.

The above describes the risk-weighted capital requirements that, one way or another, especially since 2004 when Basel II was approved, have distorted the allocation of bank credit to the real economy.

Banks are told that if they lend to the “safe”, something which they already liked, they need to hold less capital and will therefore be rewarded with higher risk-adjusted returns on their equity than if they lend to the “risky”. 

And, as a result, the “infallible sovereigns”, the housing sector and the AAAristocracy receive too much bank credit in too lenient terms; while the “risky” medium and small businesses, entrepreneurs and start-ups receive too little credit in too onerous terms. And as a result the banks grow dangerously obese with “safe” fats and carbohydrates, all while the real economy becomes weakened from the lack of “risky” proteins.

And so, if Harford can express the “frustration of watching… Titanic… The ship is doomed, yet our heroes suspect nothing ”, when reading the recently published transcripts of the Federal Reserve’s Open Market Committee held on September 16 2008, to me it is worse. 

I see no evidence of that, at least with respect to bank regulations, "our heroes" show they knew they were setting the course on an iceberg. Worse yet, they might still not know it, and so our banks and our economies are set on the course of crashing into new icebergs.

March 07, 2014

Why can’t lending to female entrepreneurs be leveraged as much as lending to “infallible” sovereigns?

Sir, Gillian Tett writes about Goldman teaming up with the International Finance Corporation, the private sector lending arm of the World Bank, by putting $50m into a $600m fund that would extend loans to 100.000 cash starved female entrepreneurs, “Goldman discovers that money can buy respect”, March 7.

That represents a 12 to 1 leverage which, when compared to the 33 to 1 leverage Basel III minimum allowed by the 3% leverage ratio, seems extremely small, in relative terms. As I see it there is no doubt that a well diversified portfolio of loans to female (or male) entrepreneurs must be more productive and safer than a portfolio concentrated in loans to some infallible sovereign, to the housing sector or to someone of the AAAristocracy. If so the fund instead of $600m could be $1.650. 

In conclusion, Morgan and the World Bank should be able to do much better for women entrepreneurs by lobbying the Basel Committee… though I do understand that the publicity value of such efforts might not be that large.

March 06, 2014

FT, perhaps you should ask for some time out in order to collect your marbles.

Sir I refer to your “The BoE’s big test is yet to come” March 6.

You write “QE has increased wealth inequality” true, but then, sort of as an excuse, you hold that “some of this inequality is temporary and will be reversed when the monetary support is withdrawn”. A truly astonishing statement that can only be interpreted in the animas of Keynes’ “in the long run we are all dead”.

And then you write: “QE… failed to produce the kind of sharp rebound policy makers had hoped for… The banks have failed to lend to smaller enterprises, which would have helped to spur growth”. True, but then again, as a sort of excuse you hold that “the BoE does not decide what banks… do with their money”. And that Sir you should know by now, at least from my over 1000 letters to FT on the subject, is a completely false statement.

BoE, by approving of different capital requirements for banks for different assets, based on ex ante risk perceptions, allow banks to earn different risk-adjusted returns on equity for different assets… and if you think that does not represent the kind of carrots and sticks that make banks decide what to do with their money, then you might be in need of some time out in order to collect your marbles.

March 05, 2014

Britain, if you had oil revenue power concentrated like in Venezuela, yours could be even more of a ‘malandro’, a hoodlum, nation.

Sir, I refer to 99.99% of what is currently written about Venezuela, like yours “Venezuela: the ‘malandro’ nation” March 5.

If you’d only taken time to really set yourself into the challenges of a country where over 98 percent of all its exports go into government coffers, you would not be writing about a “Hugo Chávez legacy” or the charmlessness of his successor, Nicolas Maduro.

You would probably be writing about the fact that no one, no matter how good intentions he has, no matter how charming he is, no matter how brilliant he might be, should, in the company of some few petrocrats and oilygarchs, have the right to wield such extraordinary powers.

And Andres Schipani titles his report “Venezuela´s poor wait for the revolution to deliver”, which only helps to promote the illusion of something waiting for them at the end of the rainbow. A much better title would be “Venezuela´s ever growing poor keep standing in the wrong line”

No Sir, let me assure you that if your Britain was set up as my Venezuela is, yours might be a much more ´malandro’ nation than mine… suffice to see what happened when some of your kings wielded too much power… and heads rolled!

March 04, 2014

When fighting inequality, in a sustainable way, it is more important to distribute opportunities than to redistribute income.

Sir Jonathan Ostry, a deputy director of the research department of the IMF holds that some recent research indicates that “Redistribution is associated with higher and more durable growth” “We do not have to live with the scourge of inequality” March 4.

Indeed that might be so but, before redistributing income, making sure opportunities are equally distributed, is much more important when fighting inequality, at least in a sustainable way.

For instance there are some ludicrous risk based capital requirements for banks that by favoring the “infallible sovereigns” the housing sector and the AAAristocracy, discriminate against the access to bank credit of “the risky”, mostly the medium and small businesses, the entrepreneurs and start-ups.

Unfortunately, both the World Bank and the IMF have been totally silent on this inequality driver for much too long.

If Ostry really wants to help out, then he should recommend IMF’s research department to look into the reasons for all major bank crisis in history. That research would be extremely helpful, since it would certainly indicate that the Basel Committee for Banking Supervision is going after the wrong “risky”.

March 03, 2014

Unfortunately, the fact that something is correctly stated does not suffice for it to be correctly understood

Sir, John Authers writes “Risk is greatest when there is no perception of risk” March 3. Indeed that is what I have written to you and to Authers innumerable letters over the years. Those perceived as “absolutely safe” are those who pose the largest possibility of dangerous unexpected losses.

And yet, nailing the truth, and even holding that “regulation can easily be counterproductive”, Authers’ still seems incapable, or not wanting, to extract the most important lesson from it.

That lesson is of course that current risk based capital requirements for banks, those based on the perceptions about the risks of expected losses make absolutely no sense at all.

The strange inability to infer the right conclusions from the right facts is also made very clear by how Authers’ ends his article. There he holds that the cure for “the greatest risks come from those things that have no history of problems, and which are not perceived as high risk” is additional “research [in this case] into fund manager’s systemic risks”… and that, Sir, is proposing to dig us even deeper in the hole he now knows we’re in.

To find a solution to Venezuela, you have to be clear about its problem.

Sir, John Paul Rathbone, Andres Schipani and Mark Frank write “Venezuela: In search of a solution” March 3.

I am sorry, that neither Venezuela nor your reporters can identify the real problem, just shows how hard it is to develop a solution to its problems.

Let me just ask… what would you believe the real problem of the Britain would be, if your government was receiving, as income, to dispose of in any way it liked, over 98 percent of Britain’s exports?

What’s the added value of bank regulators who only concern themselves with the risks bankers already perceive?

Sir I refer to Martin Arnold´s “Foreign banks scramble to calculate potential losses if crisis deepens [in Ukraine]", March 3, just to remind you of the fact that these are the type of “unexpected losses” against which bank regulators, in excess of their quite low leverage ratio, do not require banks to have capital against.

In other words poor us, our banks are in hand of regulators who are primarily concerned with the risks we, or at least our bankers, should all be able to perceive. What’s the added value of that?

March 01, 2014

Risk weighted capital requirements for banks guarantee excessive exposures against little capital

Sir, I refer to Martin Wolf’s lunch conversation with Andrew Smithers, “I don’t have any faith in forecasts” March 1.

In it Wolf quotes Smither saying “There’s a chapter in the new book on what I think economics should be about, which is not forecasts. It’s about not taking the wrong risks. You don’t know what’s going to happen but you can avoid excessive risk-taking and this, unfortunately, has not been the policy of the Federal Reserve”… and I would have to add, and neither of the Basel Committee.

Bank regulators, with their risk-weighted capital requirements, which are not even based on forecasts but on current ex ante perceptions of risks, guarantee excessive risk taking, against very little capital, to what is perceived as absolutely safe.

I am not copying Martin Wolf with this as he has expressed not wanting to hear more from me about risk-based capital requirements… he knows it all, at least so he says, but, since the above is precisely what Wolf seems unable to understand… perhaps you should copy him.