May 31, 2016

If IMF seems to favor the private sector, rest assure it is favoring even more its shareholders, the governments.

Sir you write “International Monetary Fund last week…published an article questioning its own neoliberal tendencies…concluding that “instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion”. And you describe it, marvelously imaged, with that “In seeking to be trendy, the IMF instead looks as out of date as a middle-aged man wearing a baseball cap backwards”, “A misplaced mea culpa for neoliberalism” May 31.

My opinion though is that if a mea culpa should be forthcoming from the IMF that should have more to do with how they allowed the label neoliberalism to cover up for statism. For instance most public services privatized in Latin America were awarded based on who offered to pay the governments the most, not on who offered to charge the lowest tariffs; and so all money received became de facto tax advances to governments, to be later covered by customers having to pay higher tariffs. Neoliberalism? Hah!

John Williamson coined the term “The Washington Consensus” that was rightly or wrongly adopted as a stand in for neoliberalism, in 1989.

The year before, the Basel Accord, determined that for the purpose of setting the capital requirements for banks, the risk weight of sovereigns, at least those of the OECD, was zero percent, while the risk weight of citizens, the private sector, was 100 percent.

What neoliberalism can thrive along side such virulent statism as that displayed by the Basel Committee?

Let us not fool ourselves; IMF represents the governments, not the private sector, not the citizens. If it does something that seems to favor the private sector, the citizens, rest assure it is by doing so favoring governments even more.

@PerKurowski ©

May 30, 2016

In the midst of the Venezuelan pandemonium, is not selling petrol at less than $2 cents a liter a crime?

Sir, Daniel Lansberg-Rodriguez, describing Venezuela’s current plight writes: “Food and medicine are scarce. Anemic oil prices and a heavy debt load leave scant foreign exchange for the import sector. “Venezuela sets the stage for a chaotic and tragic exit” May 30.

What’s worse, within the pandemonium, few react to that petrol, even after it was raised a 6.000 percent in February this year, is still being sold at less than $2 cents per liter. Perhaps the most serious problem in Venezuela is not Maduro, but the lack of a responsible elite, that is willing to speak up on what is wrong and right.

If the price of petrol sold domestically was raised to its world value, and the resulting revenues all paid out in cash, to all citizens, that could provide them with what they might need to cover the basic food needs. And, to top it up, that would free a lot of petrol for exports.

I myself have tried for long to have the Organization of American States to look into if whether giving away petrol almost for free, while there is lack of food and medicines, does not qualify as an economic crime against humanity. Seemingly OAS/OEA prefer to look the other way.

@PerKurowski ©

FT, more bank credit to “safer” grown-up trees, and less to “riskier” green-shoots, must result in lower productivity

Sir, you write “There can be few problems that are so important and yet command so little consensus about their source and solution as the general slide in productivity growth across the world’s economies”, “The puzzle that baffles the world’s economies”, May 30.

And yet you refuse to echo my concerns that the risk-weighted capital requirements for banks, which allow banks to earn higher risk adjusted returns on equity on what is ex ante perceived, decreed or concocted as safe, than on what is perceived risky, creates serious distortions in the allocation of bank credit.

I have I written at least on 100 letters to you on that issue? How many have you ignored? All!

@PerKurowski ©

May 28, 2016

The “peak end” rule factor is very dangerous. It fools us into interpreting ex post resulting risks, as real ex ante risks.

Sir, Tim Harford writes about “How the sense of an ending shapes memory” May 28

In it Harford refers to the “peak-end rule” that arose from a 1993 study titled "When More Pain Is Preferred to Less: Adding a Better End" by Daniel Kahneman, Barbara Fredrickson, Charles Schreiber, and Donald Redelmeier. 

That rule also points like at us remembering more the status found at the end, the ex post, than the one existing at the beginning, the ex ante.

At the end of a bank crisis, many bank borrowers might appear with a Below BB- rating. And therefore this “peak-end” rule might explain, why regulators awarded the below BB- rated a 150 percent risk weight. 

That is ​so tragically dumb, since the banks would never ever have created, ex ante, the dangerous excessive bank exposures to below BB-rated.

Those were more likely to have happened, and are much more likely to happen, with the AAA to AA rated; those awarded a meager 20 percent risk weight.

@PerKurowski ©

Bank regulators are financially advising Europe as that “grandmother” Pope Francis considers Europe now is

Sir, Tony Barber in his essay “State of the Union” of May 28 writes: 

“Pope Francis pulled no punches in November 2014 when he addressed the European Parliament on the EU’s deepening malaise. “In many quarters we encounter a general impression of weariness and ageing, of a Europe which is now a ‘grandmother’, no longer fertile and vibrant. As a result, the great ideas which once inspired Europe seem to have lost their attraction, only to be replaced by the bureaucratic technicalities of its institutions,” the pope said.”

Well if Europe is now a grandmother, then the credit risk adverse bank regulations could be perfectly appropriate; in fact any financial advisor, advising a grandmother should advice her something similar... or he would be disqualified.

But I know, for a fact, that Europe is now no longer fertile and vibrant, was turned into a grandmother, partly because regulators, with bureaucratic technicalities, do not allow banks to take those risks the young need to be taken, in order to keep the economy fertile and vibrant, and so that they could also have a better future.

Europe, if a good grandmother, should not permit the Basel Committee to regulate banks hurting its grandchildren. Let us all pray for that Europe has not turned into a bad and egoistical grandmother.

@PerKurowski ©

May 27, 2016

Universal Basic Income is a Societal Dividend, paid mostly by reducing the margins of the redistribution profiteers

Sir, John Thornhill and Ralph Atkins discuss the Universal Basic Income proposals flying around. “Money for nothing”, May 27

If anyone should stand up for ideas like the Universal Basic Income, that would be the poor of Venezuela. Out of an incredible oil boom, the 21st Century Socialism gave them less than 15 percent of what should have been their fair equal per capita share of those revenues. The rest was mostly swindled away by redistribution profiteers, wasted away by incapable government besserwissers or captured by “better-positioned” citizens.

For a Venezuelan to read about “Labor leaders… wary of introducing UBI, fearing it might only be used by rightwing politicians to shred the existing welfare state. By setting the rate too low and withdrawing other welfare benefits, it could end up hurting the very people it was designed to help most”, is sadly laughable.

And “the superficially preposterous idea of handing out an unconditional basic income of a year to every citizen, regardless of work, wealth or their social contribution”, a participation in the society, is not much more preposterous than a citizen inheriting some shares of a corporation that gives him the right to a dividend.

Also if we could only separate the redistribution from other government activities it would be so much easier to know what is happening, and therefore be better able to resist the calls of populist demagogues.

But the Universal Basic Income, to really fulfill its purpose needs to be the result of a citizens-to-citizens societal agreement, a Societal Dividend, or a Citizen's Dividend of that sort proposed by Thomas Paine; and not just a handout by governments and politicians that citizens need to be grateful for. On the contrary one of its major benefits it that it reduces the forced citizen submissiveness to those who dole out "the favors". Again, just look at the Venezuelans, suffering all type of humiliations, even being taunted and insulted, and not much happens.

And Universal Basic Income plans, if funded by carbon and petrol taxes would help to align the incentives for the fight against climate change with that of the fight against inequality.

And Universal Basic Income could be the first step in order to create decent and worthy conditions for that structural unemployment that seems to be growing

And let us be frank, if the Universal Basic Income is not offered voluntarily, and inequality grows, there will be many less voluntary and much harder options flying around for redistribution.

Universal Basic Income, is not “Money for nothing”, it might very well be money for better chances of the societal peace, which is required to achieve more and better development.

Universal Basic Income is not about assigning governments more power. On the contrary it is about wrestling redistribution powers from their hands.

@PerKurowski ©

Mexico needs carbon and petrol tax, which revenues are all redistributed by a Universal Basic Income mechanism.

Mexico needs to align incentives on pollution

Sir, Jude Webber writes about the horrible pollution caused by the excessive number of cars in Mexico City (“Corruption and car fumes clog up the capital”, Notebook, May 26) and proposes that eliminating corruption in emission testing could be an important part of solving this. Fat chance! As a Venezuelan, I know that this is not a viable route.

Ms Webber writes: “Mexicans are snapping up cars as fast as the world’s seventh largest producer can churn them out . . . Domestic consumption is the engine of economic growth so there is no official incentive to dissuade people from buying Mexican-built cars and associated products such as petrol.”

That’s really not the case. You must build up the right political and economic incentives to correct for it. If Mexico imposed carbon tax, petrol tax and a strong traffic toll system, and made sure all the revenues from it were immediately returned to the economy by means of a universal basic income, you would face a different reality. Then you would have aligned the incentives for pollution control and the fight against climate change with the fight against inequality, and that makes for a very powerful alliance.

Standing in the way, besides initial protests from car owners, would be the redistribution profiteers who would miss a chance to make political and economic capital. Just as in Venezuela.

Published in FT

Low capital requirements for banks lead, automatically, naturally, to high bonuses for bankers

Sir, Diane Coyle writes: “If the chief executive of a company seriously tells me, as a shareholder, that he will not put in as much effort as he otherwise would unless I link his pay to a handful of metrics, I have every reason to be doubtful about hiring him to do the job” “Burger flippers deserve bonuses, bankers do not” May 26.

That is absolutely right; as long as the shareholder was putting in enough efforts himself… otherwise he might better shut up in silent complicity.

If you make the argument that the bankers are helping to convince the regulators that the shareholders of a bank need to put in very little equity, and therefore the shareholders are made more irrelevant, then it is much easier to understand why bankers have been able to get away with what they are doing.

Bank equity, allowed to be highly leveraged, especially on what is perceived as safe, has produced great returns, which have kept bank shareholders happy and in a complacent mood.

Ask the banks to triple their capital, or at least put up 10 percent of equity against absolutely all assets, and then you might begin see some bonus restricting relations developing between bank managers and the shareholders of banks.

@PerKurowski ©

May 26, 2016

Regulators have been coopted by banks of “East”, forgetting the needs of those that banks of the “West” best serve.

Sir, Martin Wolf opines, “In the real world, central banks must remain our doctors of choice”, “The risks of central banks’ radical treatments”, May 26.

In it Wolf quotes Mario Draghi, president of the ECB, with: low interest rates “are not the problem. They are the symptom of an underlying problem, which is insufficient investment demand, across the world, to absorb all the savings available in the economy.”

But Draghi, the former chair of the Financial Stability Board, is the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision, and so he is more than a central banker, he is a bank regulator too… and as such he is definitely not my doctor of choice.

With Basel regulations banks have de-facto been told: “If you stay away from lending to the risky (like SMEs and entrepreneurs) then we will reward you with lower capital requirements for what is perceived, decreed or concocted as safe; which means that then you will be able to leverage your equity the most with assets of the “safe” type; which means that then you will earn the highest risk adjusted returns on your equity when doing business with sovereigns and the AAArisktocracy, and financing residential housing.” Does that not sound like a banker’s wet dream come true”

And to put that regulatory favoring of the safe into context, let me quote one who Wolf would not classify as a rightwing populist, John Kenneth Galbraith. In his book “Money: “whence it came, where it went” (1975), Galbraith writes:

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created] 

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

And so, to me, that clearly implies that the regulators of the Basel Committee are regulating in favor of, or under instructions from, the banks of “East” and the sovereigns, the respectfully affluent they meet in Davos; while completely ignoring the risk-taking needs of the new economy of the “West”, and for which any additional bias against perceived credit risk, condemns it to even more misery and doom.

In the West live the unemployed, the younger generations, the developing economies and all those clamoring for an opportunity to have a go at their dreams. 

The prime purpose of banks is to channelize efficiently excessive savings to the economy and, if you cut off the options, just because you do not like banks to take risks, those excessive savings must find other outlets or do nothing… all with expected unexpected consequences.

To top it up, regulators did not do their basic homework. Had they done so they would have understood that for the bank systems in general, what is perceived ex ante as risky, poses no danger at all. All big bank crises always result from excessive exposures to something wrongly perceived ex ante as safe.

PS. The following risk weights, for the purpose of determining the capital requirements for banks, evidence clearly he dangerous ideology and ignorance of the member of the Basel Committee.

Sovereigns 0% Citizens 100% can only be risk weights thought up by convinced raving mad statists. 
AAA rated 20% Below BB- rated 150% can only be risk weights thought up by those who have no idea of life on Main Street.

Per Kurowski

@PerKurowski ©

May 24, 2016

Martin Wolf blames squarely the elite. I agree, but, in the elite to be blamed, Martin Wolf is one.

Sir, you must understand why, as a Venezuelan, suffering the real life impacts from leftwing populism, I find it so hard to identify with Martin Wolf’s “How to defeat rightwing populism” May 25.

Wolf writes: “Many seem to think that things could not get worse. Oh yes, they could. Things could get far worse, not just in the US, but across the world”. In that Wolf is absolutely right.

But when he then adds: “Mr Trump… has no notion of the foundations of US success” I must react.

Because Trump, as one of those go get it risk it all entrepreneur, is so much more the reflection of the foundations of the US success, than, for instance, those sissy bank regulators who decree that banks must hold more capital against what is perceived as risky… as if being perceived as risky is not bad enough.

Do I believe Trump is a rightwing populist? Yes I do! And do I think he would be good for America as a president? No I don’t!

But, just like Wolf writes: “If rightwing populism is to be defeated, one must offer alternatives”, one of those alternatives is telling it like it is! And Wolf does not!

When Wolf writes: “US banks have paid more than $200bn in fines” the question should be: what would have happened if those fines, as so many times I had written to FT about had, instead of in cash, been paid in voting shares of the banks? Then we would at least not be suffering the bank credit austerity that results from higher capital requirements when bank capital is scarce.

Martin Wolf blames squarely the elite. Again I agree, but, in that elite, I also include Martin Wolf. How the heck can he defend capital requirements for banks that set a risk weight of zero for the sovereign, and one of 100 percent or more for the citizens on which the sovereign’s strength depends?

Wolf writes: “Populists despise institutions and reject expertise. They offer, instead, charisma and ignorance”. Does he mean like that populist ignorance which has offered to make our banks safe, by putting a risk weight of 20% on the AAA to AA rated and 150% on the below BB- rated, those that the banks would, ex ante, not even touch with a ten feet pole?

@PerKurowski ©

The gig and the no jobs economy need a Universal Basic Income. It also helps to keep redistribution profiteers at bay.

Sir, you discuss Senator Elizabeth Warren’s framework to “rethink the basic bargain for workers” “The gig economy needs a new bargain for workers” May 24.

I think we need to think equally, simultaneously, of those not working, as there is little doubt there could be a severe lack of all type of jobs.

In 2012 in an Op-Ed I wrote that the society also had to prepare itself to handle a growing number of unemployed, not cyclical but structural, that is, those who never ever in their life will have a chance to get an economically productive job, “We need worthy and decent unemployments”.

I argued there: “The power of a nation, and the productivity of its economy, which so far has depended primarily on the quality of its employees may, will in the future, also depend on the quality of its unemployed, as a minimum in the sense of these not interrupting those working.”

And one of the first things that should be put in place for that is a Universal Basic Income floor, one that is completely independent of the having or not having a job. That, which should be the result of a social contract among citizens, and not the result of governments bringing gifts, will help to redistribute in the most cost effective and least socially diminishing way.

And if that income floor exists, then, contrary to what Senator Warren holds, in order to get more jobs and better salaries, I would call on all capitalists to exploit any low salaries, for as much as they can. 

PS. Should not companies also be part of the gig economy, so as not to waste resources trying to hang on? 

@PerKurowski ©

The AAA and AA rated are especially exposed to bank regulations that endanger their future.

Sir, Eric Platt quotes Nick Gartside of JPMorgan with: “In a way, double A has become the new triple A, when you have a lot less triple A debt out there,”“Triple A quality fades as groups embrace debt” May 24.

But, in terms of the risk weights imposed on banks with Basel II, triple A and double A have the same one, 20%. A+ to A has 50% and then all the rest jumps to 100% or more.

Like Platt writes many factors affects the disappearance of Triple A. But, the distortions produced by allowing banks to leverage more when lending to the safe, than when lending to the risky, cause the banks to pester and tempt “the safe” for business. And that guarantees that too much bank credit will be given in too easy conditions to the safe… and that will, sooner or later, endanger the safe (and the banks). C’est la vie!

@PerKurowski ©

May 23, 2016

Europe took huge Eurozone risk, but does not dare their banks taking risks on “risky” SMEs and entrepreneurs. Crazy!

Sir, Wolfgang Münchau ends his “The IMF should call Berlin’s bluff over Greece” of May 23 with: “The combination of debt relief, a realistic fiscal trajectory and economic reforms would end the Greek crisis at a stroke”

No way Jose! No Greek crisis can be resolved without resolving the Europe / Eurozone / America / Western World crisis. And that crisis cannot be resolved without, as a minimum, allowing banks to allocate credit more effectively to the real economy.

Sir, I ask, what do you believe the European parliaments would have said if the current Basel bank regulations were presented in the following way to them?

“In order to make banks safer, and allow them to give more credit, we will reduce the capital requirements for banks when they hold what are ex ante perceived safe assets, like residential mortgages, and loans to sovereigns and to those with great credit ratings.

This will mean banks can leverage more their equity with these safe assets, and which results in that banks will earn higher risk adjusted returns on these assets.

You might argue that then banks might not lend sufficiently to the risky SMEs and entrepreneurs. You are right, but, as you must understand, you can’t have the cake and eat it too.”

Would European parliaments have approved? Perhaps, but at least they would have been better informed about the consequences. And those who understand that risk-taking is what keeps an economy moving forward, and has helped Europe to become what it is, could have better alerted about the obese non-muscular growth that would result. “Bye-bye bank credit proteins, hello-hello bank credit carbs!”

Europe risked indeed a lot with the Euro so how sad it does not dare to risk it with its SMEs and entrepreneurs.

@PerKurowski ©

To drop money on an economy, without cleaning its clogged pipes, is not to give helicopter money a fair chance to work

Sir, Adair Turner the former chairman of the Financial Services Authority writes: “Eight years after the 2008 financial crisis the global economy is still stuck with slow growth, inflation levels that are too low and rising debt burdens. Massive monetary stimulus has failed to generate adequate demand. Money-financed fiscal deficits — more popularly labeled “helicopter money” — seems one of the few policy options left.” “Not too much, not too little — the helicopter drop demands balance” May 22.

What? Should we not first begin by clearly understanding why the stimulus did not work?

Turner writes: “Can we design a regime that will guard against future excess, and that households, companies and financial markets believe will do so. The answer may turn out to be no: and if so we may be stuck for many more years facing low growth, inflation below target, and rising debt levels. But we should at least debate whether the problem can be solved.”

Yes we should really debate! But we should start that debate by questioning the risk weighted capital requirements for banks, those that were first introduced by the regulators almost three decades ago, and later, in 2004, made much more poisonous with Basel II.

And so, just for a starter, I would ask these five questions:

1. Where did you regulator get the idea of being able to regulate our banks without first clearly defining what is the purpose of our banks?

2. Where did you regulator get the idea of giving a risk weight of zero percent to the sovereign, and one of 100 percent to those citizens that define the sovereigns’ strength? Do you really believe bureaucrats know better what to do with other peoples’ money than citizens with their own?

3. Where did you regulator get the idea of assigning a risk weight of 150 percent to those below BB- rated, and only one of 20% to those rated ex ante AAA that you know cause more the major bank crises in the world, when they ex post turn out to be risky?

4. Where did you regulator get the idea that assigning different capital requirements, and thereby different equity leverage possibilities, would not seriously distort the allocation of credit to the real economy?

5. And, where did you regulator get the idea that requiring banks to hold more capital against the risky, would not make it harder for the risky to access bank credit, and thereby increase inequality?

Sir, it is soon a decade since a big bank crisis broke out because of excessive exposures to something that was backed with very little capital, only because it had been perceived, decreed and concocted as safe… and yet that truth is not being discussed. Sorry, that is totally unacceptable. All evidence points to the tragic truth that highly unqualified technocrats are regulating our banks.

I advance the explanation that the previous stimulus had no chance of working because these regulations had clogged some pipes of the economy. And to drop helicopter money on an economy, without cleaning those pipes, is not to give helicopter money even a fair chance to work.

PS. Also, why should we trust the helicopter pilots?

@PerKurowski ©

Is the concept of economic crimes against humanity too much for governments to handle?

Sir, Andres Schipani writes that Henrique Capriles, with respect to the government’s actions on the recall referendum says: “they will be blocking the only democratic solution we have now. That will be throwing petrol on to the fire.” “Maduro rival rallies revolt in Venezuela

But, what about throwing some petrol on the hunger in Venezuela? Even after it was raised a mindboggling 6.000 percent in February this year, petrol is still mindboggling being sold at less than $2 cents per liter.

Luis Almagro, the head of the Organisation of American States finally speaks out on the issue of Venezuela, good for him. The previous decade, under the chair of José Miguel Insulza, OAS’s silence was just too embarrassing.

But Almagro should also ask the Inter-American Commision on Human Rights: Is not the giveaway of petrol in a country where there is lack of food and medicines, an economic crime against humanity?

I formally asked IACHD that in 2015, and in 2009 by means of an Op-Ed in Caracas, but I never received any response. I wonder, is the sole concept of economic crimes against humanity just too much for governments to handle?

In Venezuela I have proposed to increase the locally sold petrol to at least its world price as a commodity, and share out with all citizens the new revenues. In this way most citizens would be a bit better positioned to deal with the de-facto state of emergency that exists. And petrol consumption would go down, and more petrol could be exported.

@PerKurowski ©

May 22, 2016

FCA, if bank regulators distort the allocation of credit to the real economy, is it good conduct or criminally stupid?

Sir, I refer to Caroline Binham’s interesting story on how FSA, later FCA, investigated at a cost of £14m, a case of insider trading that led to the conviction of five men, “Spectrum: Watching the ‘insiders’” May 21.

In it Binham quotes Mark Steward, the Australian who leads the enforcement team at the FCA with: “We need to look at the potential for our markets to be undermined by systemic and organized crime – people who organize themselves to commit this kind of crime. And we are doing exactly that.”

But what if technocrats that can only be accused of criminal stupidity, unwittingly undermine our markets?

If there is ever a FCA investigation that is really needed, urgently, that is the one about the validity of the risk weighted capital requirements for banks.

By allowing banks to leverage more with assets perceived as safe than with assets perceived as risky, banks were allowed to earn higher expected risk adjusted returns on equity on safe assets than on risky assets; and that obviously dangerously distorted the allocation of credit to the real economy.

And for no reason at all! Never are major bank crises caused by excessive exposures to something ex ante considered as risky. The regulators assigned a risk weight of 20% for the prime AAA rated, and one of 150% for what is highly speculative and worse below BB- rated. Is one as a regulator really allowed to know so little about banks and be so stupid? Not to me!

May 21, 2016

Is Tim Harford, the undercover economist, just covering up for other economist colleagues?

Sir, Tim Harford, The undercover economist, writes about “matching mechanisms to address allocation problems without resorting to traditional markets” as “Nobody wants… to be assigned a place on the whim of a well-meaning bureaucrat who doesn’t really understand the situation.” “The refugee crisis – match us if you can” May 21.

O yeah! But why does he allow well-meaning bank regulators, who clearly don’t understand the situation, to distort the so essential allocation of credit to the real economy?

One thing is sure, no matching mechanism ever, would help those who by being perceived as safe already have easier access to bank credit, like sovereigns and the AAArisktocracy, at the cost of making life harder for those who perceived as risky, already have more difficult access to bank credit, like SMEs and entrepreneurs.

And no matching mechanism ever, would push banks to build up excessive exposures against little capital to those who have always produced the big bank crises, namely those ex ante perceived as safe that ex post turn out to be risky.

Could it just be that the undercover economist is really just an economist covering up for other colleagues’ mistakes?

@PerKurowski ©

Though redistribution profiteers believe it and demagogues want you to believe it, there are no “huge piles of cash”

Sir, the word “cash” appears 8 times in Eric Platt’s “US tech cash pile soars to $504bn as groups seek to avoid tax hit on profits” May 21. And huge cash piles are referenced to in terms of “companies hoarding cash”. 

All as if it was some cash stacked away under some mattresses. Its not, there might not even be a single dime of cash; most and perhaps all of it has already been deployed to do something; it might be invested in shares or bonds, perhaps even in long-term municipal infrastructure bonds  J   

And so what should these “cash hoarders” that currently do not want to take investment risks do? 
Why do not bank regulators start with ending their risk-weighted capital requirements, those that effectively tell banks not to take risks but to keep it safe?

Sir, the truth is that legions of dumb redistribution profiteers searching for business opportunities, believe there are plenty of Ali Baba caves to be found.

And the problem is that demagogues and populists, like our Chavez and yours whoever, use that to further their own causes. FT, stop collaborating with them!

@PerKurowski ©

Hugo Chavez did not empower the poor, he empowered himself with the poor… pas la même chose

Sir, John Paul Rathbone refers to Hugo Chávez of Venezuela as a “gifted politician who, however wasteful, empowered the poor” “Nicolás Maduro Venezuela’s leftist lord of misrule” May 21.

What? Chávez might have been a gifted populist, a gifted demagogue, but he did not empower the poor, he empowered himself with the poor... pas la même chose. Just look at photos of the poor in Venezuela… do they really seem empowered?

The poor of Venezuela never got more than about15 percent of what should have been their fair per-capita share of the fantastic oil revenues that drowned the country during the Chavez years. It was just that Chávez masterfully talked and walked the leftist discourse. Which caused so many in the world to drool in admiration.

If we are going to understand how nations develop, all research needs to control for how much of fiscal revenues are received directly from citizens, how much are received indirectly from citizens, and how many of those revenues have never ever passed through a citizens pocket. But why is such research not conducted? You tell me! I advance the possibility there are just too much profits to be made redistributing.

For instance for decades I have begged that the net oil revenues of Venezuela should be distributed directly to the citizens, a sort of variable universal basic income; but the opposition to such idea from those who want more than their fair share is immense.

As for Maduro, before I was censored in Venezuela, in May 2013 I wrote “3 years until the recall referendum… Mamma Mia!” It was crystal clear from the very start that Maduro would be an unqualified disaster.

@PerKurowski ©

Going up the mountain is going north, going down is going south, and west or east doesn’t matter, anyway around it.

Sir, Gillian Tett writes of “some fascinating studies by neurologists, for example, which suggest that when people rely on GPS to navigate, they stop interacting with their environment in a cognitive sense, and their brains appear to change.” “We’d be lost without GPS

Yes, young people nowadays have no idea about a compass or what north and south is. If you by chance have a person under 15 in your car when you go up or down a hill, do the following experiment: Tell them “See we are now going north (or south)” and you will be amazed about how easy they swallow that.

But, being on this theme, we should also ask neurologists to study the brain of bankers to see how it has changed when, following the instructions of the Basel Committee, they transitioned from the “know your client” to the “read his credit rating” 

PS. Many cellphones have a compass app. Teach your kids how to use it, and keep a real compass at home  J 

@PerKurowski ©

May 20, 2016

Pity the Basel Committee’s small leverage ratio; it sure has to carry a lot of risks on its back.

Sir, with interest rates and size of exposure the expected credit risk is the risk most cleared for by banks. Yet bank regulators also wanted to clear for it, and imposed their expected credit-risk weighted capital requirements. That left out of consideration, at least until Basel III, all other risks, like for instance that of cyber attacks to which Gillian Tett refers to in “Hackers target the weakest links in the financial chain”. May 20.

I say “until Basel III”, because now banks are by force of a leverage ratio, to hold at least 3% of capital against all exposures to cover for any risk.

But the Financial Stability Board has also “Task Force on Climate-related Financial Disclosures” which reminds us of risks from climate change.

And then there are the risks of demographic changes; the risk that the economies do not react to stimulus; the risks that credit risks have not been correctly perceived; the risk of war; the risk of epidemics, negative interest rates, deflation… and a never-ending list of risks of expected or unexpected losses. 

And you know I have repeatedly called for banks to also hold some capital against the risk regulators have no idea about what they’re doing, a risk that has morphed into a frightening reality.

But what’s the enticement for banks to cover for these types of risks when they can leverage as much as they currently do? Very little… in the same vein that the bonuses you can pay out to bank managers, when little bank capital is required, can be very big.

What do I propose? The abandonment of all dumb credit risk weighted capital requirements, and move towards a leverage ratio of 8 to 12%. That should increase the importance of the shareholders vis-à-vis management. And that should help to generate more interest among shareholders into making sure better risk avoidance or risk preparedness takes place.

The process of implementing those changes must though be very carefully designed, so as not to worsen the current capital scarcity driven bank credit austerity.

PS. The fact Basel Committee argued that “a simple leverage ratio framework is critical and complementary to the risk-based capital framework” was already a confession of not knowing what they were doing, but that notitia criminis was foolishly ignored. 

@PerKurowski ©

May 19, 2016

Venezuela, and the world, is in need of a clear definition of what are odious credits and odious borrowings.

Sir, you write “China, which has loaned Caracas more than $65bn in return for oil deliveries, potentially has a big role to play. Having extended some of these loans’ maturities, officials in Beijing said that they hoped “Venezuela can properly handle” its current situation” “The ice finally begins to crack in Venezuela” May 19.

For me there are odious credits and odious borrowings, and you can bet Britain would never ever, or at least not currently, be allowed to take on public debt in such a non-transparent way, as when China lent money to the 21st Century Socialism.

You write: “A lack of basic goods and medicine has led to protests and lootings. Shortages of foreign currency, prioritised to pay overseas debts, have forced a 40 per cent drop in imports in the past year”

Who are these powerful foreign creditors that force the government to prioritize paying debt over securing food and medicine to its people? Could they be the same vagabonds that have ruined the country and are now set on to re-ruin it?

Should the creditors and or their advisors, knowing what the government was doing, have lent to Venezuela only because the risk premiums were attractive? And if so, should they have a right to be repaid?

I am not by far implying that something similar was the case in Venezuela, but, only to make the point, let me ask: Should one financing the cremation ovens of Auschwitz have a right to be repaid?

In the world there is much need for a sovereign debt restructuring mechanism but, if that is going to make us citizens any good, before entering in the notion of odious debts, it must clearly define what is odious credits and odious borrowings.

By the way, if such a definition had existed, and could have applied to odious mortgages such as those that ended up in AAA rated securities, then you might have saved yourself from the 2007-08 crisis.

PS. Are those recommending investors to lend to a country that has made no merits to receive credit, only because the rewards are high, not de facto pimping a country?

PS. Any government having to pay 3% more for public debt than the one paying the least, should not have right to contract debt.

@PerKurowski ©

May 18, 2016

John Plender, unfortunately, we are caught in more than a double bind on public debt.

Sir, I agree with everything John Plender argues in “Why governments are caught in a double bind over public debt” of May 18. 

That said I am amazed he leaves out the fact that, on top of it all, courtesy of the Basel Committee, banks currently need to hold especially little capital against that public debt... for which “the issue of solvency would resurface”

And all that because unilaterally the regulators, in 1988, with the Basel Accord suddenly decided that sovereigns posed no credit risk, and no one protested the statism that was thereby de facto introduced.

To workout our banks out of such bind, will take huge amounts of fresh bank capital and very specialized knowledge, or intuition on how to go about it, without disastrously affecting the bank lending to the rest of the economy.

@PerKurowski ©

John Kay, how can you justify the risk weight of the sovereign being zero percent? Are you a runaway statist?

Sir, John Kay holds “When real interest rates on 50-year maturities for sovereign bonds are roughly zero, there is little reason to worry about the fresh debt this imposes on our children. I am sure they would rather have houses to live in and be able to cross bridges that will outlive their parents.” “Smoke, mirrors and helicopter money” May 17.

Of course the children would, but only if they had the jobs that give them the income needed to pay for the mortgages and utilities of those houses, and only if those bridges took them somewhere they wanted or needed to go to.

And besides that real interest rates at roughly zero, should make the children think about from where is that income to pay for the parents pensions going to come, and so that they won’t have to help their loved parents survive.

Again, for the umpteenth time, if we as a society are not willing to take the risks of opening up new roads for our economy, our children’s future and ours is blocked.

And that is why I fight against the risk weighted capital requirements for banks that de the facto block these from financing the riskier future and keep them solely refinancing the for the time being safer past.

And Kay refers to “the belief that central banks can never be insolvent because they can always print money and that bank notes are not exchangeable for anything but another bank note”, but accepts that “if the central bank prints enough of them they lose their value.”

And so again I ask: If so, how can you then justify regulators setting the risk weight for so many sovereigns at zero percent? That helps the real interest rates on sovereign bonds to be low! That is a regulatory subsidy for government debt! A subsidy paid by all the "risky" that because of that are denied fair access to bank credit.

Also assigning the government a risk weight that is lower than the one given to the citizens, those who give the government its final strength, signifies, de facto, a belief that government bureaucrats know better what to do with bank credit than citizens. That is pure and unabridged statism!

@PerKurowski ©

Martin Wolf should be careful throwing stones at “short-sighted elites”. He is part of it.

Sir, Martin Wolf writes of the “failings of short-sighted elites” “An elite at the mercy of its own creation” May 17.

I fully share the serious concerns Wolf expresses, though I do believe he points the finger way too much at the Republican elite, forgetting that it really takes two to tango.

But, that said, when it comes to blaming short-sighted elites, I must point out that Wolf himself should be very careful with throwing stones

Banks are currently required to hold more capital against what is perceived as risky than against what is perceived, decreed (sovereigns) or concocted (AAA securities) as safe. And that allows banks to leverage more their equity with what is safe than with what is risky. And so that allows banks to earn higher risk adjusted returns on equity with what is “safe” than with what is “risky”.

That sets up the banks to dangerously overpopulate existing safe havens; and that stops banks from exploring risky bays where new sources of growth and job opportunities for the next generation could be found. And if that is not short-sighted what is?

And Martin Wolf, one who we can guess considers himself as part of the elite, has preferred to ignore or to keep mum on the dumb credit risk aversion of the absolutely useless bank regulators hauled up in the Basel Committee.

Had Wolf helped to point out the dangers of such shortsighted regulations; the QEs and other such stimulus would not have been so wasted; the economy could evidence some signs of hope; and so there could be much less of that discontentment that facilitates the job of demagogues.

PS. In case Martin Wolf needs a refresher on Basel madness this aide memoire might be helpful

@PerKurowski ©

May 17, 2016

FT, “Without fear and without favour”, stand up to a bank regulation “strongman” like Mario Draghi.

Sir, Gideon Rachman writes of “a global trend: the return of the ‘strongman’ leader in international politics” “Trump, Putin and the lure of the strongman” May 17.

Yes it is a worrying trend, but perhaps the Financial Times should also look at the existence of typical “strongman” in the current financial system, for instance Mario Draghi.

As I recall you have only expressed admiration for Draghi’s macho man’s “Whatever it takes” growls, without questioning much whether he has the right to do the “whatever”.

Of course, Draghi has also been able to “trade on feelings of insecurity, fear and frustration” but one should be able to expect a media that prides itself with the “Without fear and without favour” motto, to stand up a bit more against a "strongman".

And especially when there are all reasons to suspect that Draghi, the former chair of the Financial Stability Board and the current chair of the Group of Governors and Heads of Supervision of the Basel Committee, has little idea about what he is doing, at least when it comes to bank regulations.

Rachman writes of a “mutual admiration society”. Clearly only such a society would have been able to generate risk weights of 150% for the below BB- rated assets and only 20% for what is rated AAA. In any other society, someone would have posed the question I make over and over again, namely: Is not what is ex ante perceived as safe not riskier ex post for the banking system, than what is ex ante perceived as risky?

FT stop admiring so much strongman Draghi, and start to ask him and his colleagues the many questions that are pending. Like: Why do they base the requirements for that capital that should be there in case of unexpected losses, on the most already cleared for bank risk, the expected credit losses?

@PerKurowski ©

May 16, 2016

The best pension security you can get is to have grandchildren who love you and who work in a not too bad economy.

Sir, John Plender valiantly discusses one of the most difficult and delicate current problems, namely if tomorrows pensioners will even come close to collect on their expectations, “Uncertainty clouds the outlook for pension funds” May 16.

And looking at the problem solely from the perspective of the current manipulated low rates he already concludes: “What we can safely posit is that an exit from the low or negative rates that cause the blight, however desirable for the pensions system, is unlikely to be a smooth and painless affair”

Add to that longer life expectancies, more robots - less job opportunities, already extremely high indebtedness, climate change, demographic changes, existing inequality and quite possibly much weaker economies… and we start getting the feeling that the only variables capable of balancing the disastrous pension outlooks… are those variables we do not even want to think of… down the line of epidemics and wars.

But how could it not be?

Never ever before has a generation consumed as much of any existing borrowing capacity to sustain its own consumption… so of course little is left for retirement.

And to top it up, we have had to suffer the risk aversion of manipulating regulators who do not want our banks to take the risks that building a healthy future economy needs.

When in the past I often protested the implicit promises of sustainable high rates of return of pension fund plans, I remember always ending up with that the best pension plan was to have children that loved you and who worked in an economy that was not too bad. And I have found no reason to change that opinion… much the contrary… although I now include loving grandchildren too J