May 06, 2016

How do you protect your portfolio from the technocratic populists and demagogues, like those of the Basel Committee?

Sir, Gillian Tett writes about populism, protection and regulations and tells us “Protect your portfolio from the populists” May 6.

And so I would ask her how could we protect our portfolio from the populism and demagoguery of our bank regulators, the Basel Committee and friends?

With the risk weighted capital requirements they tell us they are making our banks safer. Just the term “risk-weighted” transmits the notion that risks have now been cleared for.

I can see a regulator standing there on a balcony in Basel and, in the best Peron style, voice out loudly “We will risk-weigh, we will risk-weigh, we will risk-weigh your banks”. And I can also see the audience, including too many from FT, fascinated, in trance, responding with admiring and adoring “Viva!

But the only thing that risk-weighing does, is to allow banks to earn higher risk adjusted returns on equity for assets perceived, decreed or concocted as safe than for assets perceived as risky. And so that means banks will now lend too much and at too low rates to the “safe” and too little at too high relative rates to the “risky”.

And it is all so sadly stupid, because if there is any risk already weighted for in banking that is the perceived credit risk.

And so if understanding that this distortion of the allocation of credit will be bad for the real economy, and that, sooner or later, some safe-havens will become dangerously overpopulated, what does one do?

Of course while technocrats with QEs, negative interests and similar insist on stimulating the economy, the value of many assets, those not included in inflation basket, will inflate. But, long term we know that without a sturdy real economy to back these assets up, these will also suffer.

Sir, no matter what Ms. Tett might think, I assure you it is probably much easier to protect your portfolio against ordinary populists, than against these the technocratic populists and demagogues.

"We will risk-weigh your banks!"
"Peron, Peron, Peron!"
@PerKurowski ©