October 31, 2016

Math can be destructive, especially when applied to main-street by deskbound mathematicians with ulterior motives

Sir, as an Executive Director at the World Bank, in October 2004, in a formal statement I wrote: “Phrases such as “absolute risk-free arbitrage income opportunities” should be banned in our Knowledge Bank. We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

So clearly I cannot but to be in total agreement with the general concept of Cathy O’Neil’s “Weapons of Math Destruction” and as reported by Federica Cocco in “A manual for citizens taking on the machines” October 31.

But, I say “general agreement”, because I am not against math per se, just against math and models when applied to the real world by desk-bound mathematicians (and economists) who have never walked on main street; and are perhaps pursuing ulterior motives.

Take for instance credit evaluations. Do you think there is a lot of buyer interest in data that provides for a perfect credit scoring? Never so. Perfect credit scoring does not produce big profits. Big profits are the result of selling something very risky as very safe. Big profits are the result of convincing a debtor that data proves he is much riskier than what he really is.

@PerKurowski ©

We must learn how to keep all the profiteers of all the worthy social causes and fights at bay.

Sir, Jonathan Ford is on a very right track with his “How subsidy culture keeps Britain’s green industry in the black” October 31.

Of course we all want more jobs, a better and more sustainable environment, more equality in the world (at least most of us), and many other good things. But, in order to afford helping that to happen, we must learn how to keep the profiteers of those causes and fights at bay.

That, we do much better by providing the right economic signals, than by having some few deciding on how to allot among some other few, our contributions to the cause.

For instance, instead of capital requirements for banks based on perceived risks, credit ratings, and that only help to increase inequalities, we would all be better if regulators used some based on job creation and environmental sustainability ratings. Some lower capital requirements when financing those social goods would allow them to earn higher expected risk adjusted returns on equity.

And we should also use specific taxes that send the right economic signals, without causing too much pain or generating direct distortions. For instance a huge carbon tax, which revenues are all poured back to the economy by means of a Universal Basic (variable) Income, would be a great help, for the environment, for the economy, and therefore for jobs.

Sir, the problem though is that there we have to go up against the re-distribution profiteers, and as you know they are very very strong, since most of them are so firmly entrenched as do-gooders’ in the public sector.

@PerKurowski ©

October 29, 2016

Tim Harford, why should the 2008 bank crisis have reminded even an "undercover" economist of that “banking matters”?

Sir, Tim Harford writes: “If 2008 was a sharp reminder that banking matters, then 2016 has reminded us that politics matters too” “Prediction in an age of uncertainty” October 29.

Obviously this has to be a statement made by a deskbound undercover economist, or by one of his current bank regulation technocrats colleagues, and not by a main-street economist. If there is little as important to an economy’s real day-today, always, that is the access to bank credit, especially in a Europe so dominated by banks.

Here Harford also writes about predictions in age on uncertainty, without seemingly having understood that the Basel Committee’s capital requirements for banks were predicated on believing in a 100% world of certainty.

Harford refers to Nicholas Bloom concluding in that “uncertainty also causes recessions because it makes consumers, employers and investors hesitate before spending money. And if we all hesitate, that is exactly what a recession looks like.”

Sir, but what is more hesitation than that what bank regulators showed, when they decided banks should not be able to leverage as much with what they perceived as risky than with what they perceived as safe… as if banks had ever done such thing.

@PerKurowski ©

Gillian Tett, worry less about grey-hair’s casinos and much more about your young’s bank regulators manipulated ones.

Sir, Gillian Tett, as she should, becomes depressed when she ends up at an Atlantic City casino that “looked more like an electronic opium den for senior citizen.” “The rise of the silver slotter leaves me with a sour taste” October 29.

But, unless there is fraud, each one of those bets at the Atlantic City casino, has exactly the same expected pay out; namely a slight negative value because of the houses wins, like that when a zero comes up on the roulette. The cost of entertainment.

But out there in the other world, in the Main-Street, regulators have told banks that if they play it safe, like on black or read, like on sovereigns, AAA rated, or financing residential houses, they will earn much higher (expected) returns on equity, than if they bet on risky SMEs or entrepreneurs.

If Gillian Tett is concerned about the future of her children and grandchildren, that should depress her much more.

Sir, even though I have seen some few casino players fading away in absolute tragic destitution, I assure you that what the Basel Committee has done to the grey haired future of my, and your children and grand children, leaves me with a much more sour taste than thousands of Atlantic City casinos.

@PerKurowski ©

If Uber drivers are considered workers, are not driverless cars, or robots, workers too, to be taxed accordingly?

Sir, Sarah O’Connor, Jane Croft and Madhumita Murgia report on how “Uber drivers in the UK have won a crucial legal battle with a tribunal ruling they are “workers” entitled to the minimum wage and holiday pay.” “British court rules Uber drivers are ‘workers’ in setback for ‘gig economy’” October 29.

Yes, but if so, why are not those driverless cars that are expected to soon be supplanting all drivers not considered workers too?

Sir, as I have written to you before, if we do not tax what will represent lost work opportunities for humans, something’s going to have to give.

I have nothing against artificial intelligence or robots replacing human workers. That’s great, that will leave us humans much more time to enjoy life. But our non-human replacement workers need to be taxed too; and all those tax revenues re-distributed to all of us humans, by means of Universal Basic Income. That so that we humans will be able to afford enjoying all our additional spare time.

And it is all a case of simple justice. If a company does not employ me because of the payroll taxes I generate for him, should not my robotic substitute be charged with those same taxes?

And a Universal Basic Income would make it so much easier for all us humans to adapt to the gig-economy… we would not have to work 16 hours a day to make a living, perhaps 4 hors would do.

PS. I pray for my grandchildren not having to live surrounded by dumb artificial intelligence and lousy 2nd class robots  

@PerKurowski ©

October 27, 2016

Progressives, is ECB’s Mario Draghi shamelessly insulting your intelligence, lying to your face, or just clueless?

Sir, Claire Jones writes: “Mario Draghi hit back on behalf of monetary global policymakers, dismissing growing criticism that their aggressive actions to support the economy had widened the gap between rich and poor”, Draghi said “We have every reason to believe that, with the impetus provided by our recent measures, monetary policy is working as expected: by boosting consumption and investment and creating jobs, which is always socially progressive” "Draghi denies QE hits poor hardest" October 27

Draghi is lying, that is unless he is dangerously clueless!

Besides being President of the European Central Bank, Mario Draghi is 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 for Banking Supervision.

Therefore Draghi must be perfectly aware of the odious discrimination against the riskier (including the riskier future) that, by favoring so much what is ex ante perceived as safe, is imbedded in the current capital requirements for banks. The sad truth is that bank regulators, the Basel Committee and FSB, have de facto decreed inequality in the access to the opportunities represented by bank credit.

The distortion that nefarious piece of regulation produces, impedes that any stimuli, like that of already tilted in favor of assets owners QEs, can reach where it best could help to create jobs. In other words regulators make banks finance “safe” basements where the young can live with their parents, not the new “risky” jobs they need for them to also become parents.

And Sir, for Draghi to boast his policies to be “socially progressive”, must be an insult to all those who like to define themselves as progressive… that is unless that term has a totally different meaning I am unaware of.

PS: Again, here is an aide memoire on some of the monstrous mistakes of said regulations.

@PerKurowski ©

Mario Draghi, explain to a German widget maker why you assign him a higher risk weight than to a French bureaucrat

Sir, Claire Jones’ quotes Adam Posen, a former member of the UK central bank’s Monetary Policy Committee with: “at the time after the financial crisis when lending to small businesses had fallen off a cliff. It was very compelling to hear from small businesses what credit rationing felt like in practice.” “Beer and bratwurst in Bavaria a missed opportunity for ECB” October 26, to ask one question.

Sir, how do you think Mario Draghi could explain to a German widget maker that his bank, when lending to him has to hold much more capital than if it lends to his government or to some other governments, like the French one?

I ask because in essence those risk weighted capital requirements, tilted in favor of the sovereign and against We the People, de facto implies that regulatory technocrats like Draghi, think bureaucrats are better able to decide what to do with bank credit than for instance German SMEs or entrepreneurs.

Come to think of it, Adam Posen was very lucky the “eight very small business owners” he recalls meeting then at the pub, had not the faintest idea about what was going on… they probably still do not.

PS: Again, here is an aide memoire on some of the monstrous mistakes of said regulations.

@PerKurowski ©

October 26, 2016

With tighter bank capital rules and lower bank profits, risk weighting hurts economic dynamism more than ever.

Martin Wolf asks “Is globalisation reversing?” And answers “No, but it has lost dynamism… partly because opportunities for expanded processing trade have diminished, and partly because the era of large-scale trade liberalisation is over.” “Sluggish global trade growth is here to stay” October 26.

Indeed that matters, but Wolf refuses to acknowledge that the economies could also have lost much dynamism, because of credit access protectionist regulations, applied globally, that have banks refinancing more the “safer” past and present than financing the "riskier" future.

How can Wolf ignore that? I haven’t the faintest Sir; you must of course know him much better than I.

Anyone besserwissing I can besserwiss better, I can betterwiss better than you, Mr Wolf.

PS. Here again is an aide memoire on some of the monstrous mistakes of the risk weighted capital requirements for banks.

@PerKurowski ©

Should it be required for a sovereign to be placed on a “The Bad” list, for its financiers to be morally concerned?

Sir, Jonathan Wheatley and Eric Platt write: “Just how much room for manoeuvre does cash-strapped Petróleos de Venezuela have? It is the question that has dogged investors, economists and the South American country’s own people as the government of Nicolás Maduro struggles to manage a crippling debt burden and cling to power” “Debt swap respite for Venezuela state oil group” October 25.

No! I can assure you Sir that most Venezuelan’s, are much more concerned with where they will get food or medicines for today, and about whether they should dare to walk out on the street, than with PDVSA’s debt.

And that should also concern PDVSA’s creditors, because it is truly a shame if they are totally uninterested in what human right violations they might be financing.

For instance, petrol (gas) is still being sold at about US$ 1 cent per liter, only so that government partners can make a killing smuggling it over the borders.

Really, it surprises me that these type of issues seem so irrelevant to FT. 

@PerKurowski ©

October 25, 2016

How can economies gain vitality when banks finance more basements for jobless kids to stay with parents, than SMEs?

The Basel Committee’s risk weighted capital requirements for banks set the risk weight for financing residential houses is 35%, while the risk weight for loan to unrated SMEs is 100%.

That clearly means regulators feel it is better for banks to finance the “safer” basements where jobless kids can live with their parents, than to finance the “risky” SMEs that could create jobs for the kids, so they too could afford to become parents.

And to top it up, since they assign a risk weight of 0% to the sovereigns, these statist regulators also believe that bureaucrats know better what to do with bank credit credits than the private sector. 

So Sir, I am truly aghast that with such regulatory lunacy well alive and kicking, you can still believe in what you opine in “The eurozone economy regains some vitality” October 25.

@PerKurowski ©

Are liberals willfully blind or just blind? The financial crisis was caused by a mismanaged managed economy

Sir, Janan Ganesh writes: “Maybe Mrs May has a genius plan for a more managed economy stored away but do not bet on it. The British state has no enthusiasm or competence for such a burden, even after the experience of the financial crash… liberalism carried the past 40 years” “Even a homeless liberalism remains the best idea” October 25. 


What kind of liberalism assigns a 0% risk weight to the sovereign and 100% to We the People?

What kind of liberalism tells banks “We will allow you to earn much higher expected risk adjusted returns on equity, as long as you keep to what’s safe, like to what has an AAA rating, and stay away from what’s risky, like unrated SMEs?

Does Ganesh really think the financial crisis was the result of liberalism and not of a highly mismanaged managed economy?

Clearly, too many with liberal instincts have been fooled into believing the statists’ version of history that assigns the cause of the banking crisis to “deregulation”. Wake up! What caused it was the mother of all silly regulatory overextensions.

The 2007-08 crisis would never have happened were it not for the distortions in the allocation of bank credit to the real economy the risk weighted capital requirements for banks produced. Name one single asset that did not generate a ridicule low capital requirement for banks that grew into a dangerous bubble.

The ensuing slowness in economic growth is caused by those same distortions; which for instance have banks preferring to finance the basements where (homeless) kids can live with their parents, to the SMEs that stand a better chance of generating the jobs that could allow the kids to become parents too.

We had about 600 years of banking that served us fairly well. But then daft bank regulators, thru the bathroom window, in 1988, with the Basel Accord, introduced statist and foolishly risk adverse regulations. In 2004, with Basel II, they thickened the layer of risk aversion, by also imposing discrimination within the private sector, depending on credit ratings.

Next to Ganesh, Margaret Heffernan, the author of “Willful Blindness” writes “Making a fetish of overwork is bad for productivity”.

For me it begs the question: Were the loony bank regulations caused by overworked stressed technocrats in the Basel Committee?

“Death by overwork — karoshi” Might there be a Japanese word for death by technocratic stupidity?

Are liberals guilty of willful blindness too?

PS. Here a more extensive aide memoire on some of the monstrosities of such non-liberal bank regulations.

@PerKurowski ©

October 24, 2016

Post-Crash Economics Society: Risk models & credit ratings are not wrong, the credence bank regulators give these is

Sir, since I was travelling I missed David Pilling’s “Crash and learn: should we change the way we teach economics?” October 1.

It discusses the Post-Crash Economics Society that was created by students at Manchester university, mostly in response to “glaring failure of mainstream economics [that failed] to explain, much less foresee, the financial crash of 2008.”

In it Pilling quotes Andrew Haldane, chief economist at the Bank of England: “We all became overly enamoured of a particular framework for thinking, or a modelling approach… It became something of a methodological monoculture [that] was not well equipped for dealing with economies or financial systems close to, or at, breaking point.”

That sounds about right. It was not the models’ faults, but the fault of those using the models.

For instance bank regulators, with mindboggling hubris, and blind faith in the models, using only knowledge, decided that the capital requirements for banks should be based on risk models using ex ante perceived risks. That was dumb. Clearly any regulatory wisdom would have indicated that those capital requirements, should be based on the so much more dangerous consequences to the bank system that could be caused if those risk models or risk perceptions, like credit ratings, turned out to be wrong.

The faster that is understood, the faster we can bridge the differences between those who, like Angus Deaton, though accepting that “economics is a broad church” yet argue that it “needs to be kept rigorous”, and those who, like Joe Earl, want it to be “more an exploration of ideas, and less a training in the economic priesthood.”

Of course, that will require bank regulators to declare much mea-culpa, or in other ways upsetting a lot the cozy relations in their mutual admiration club.

Here a more extensive aide memoire on some of the monstrosities of such regulations.

@PerKurowski ©

Daft regulators hinder the access to bank credit of “risky” SMEs, those who could most make low interests productive

Sir, Joel Tillinghast, with his letter, and Tony James with his opinion express well serious doubts on the validity of low interests “Low interest rates are leaving pension plans desperately underfunded” and “The Fed can revive the economy with higher rates” October 24.

I would add two comments to theirs. The first is that in my experience little introduces so much pressure to get a project fast to its revenue generating point as high interest rates. In the same manner, low interest rates, can cause project laziness.

The second, much more important, is that too many SMEs and entrepreneurs, and who would love to access those lower rates cannot do so. Since banks are required to hold more capital when lending to SMEs and entrepreneurs, on account of daft regulators thinking these borrowers constitute a risk to the stability of bank systems, they get no bank credit. All worsened by the fact that since banks become less profitable, bank capital itself becomes harder and harder to access. 

As to “alternative” financing sources for those “risky” actors desperate for an opportunity to invest, Tillinghast reminds us well of “that low interest rates do not mean lower credit card or payday loan rates”.

@PerKurowski ©

October 22, 2016

I am a whistleblower on Basel Committee’s monstrous mistakes, but FT might not have seen my 2.375 letters either

Sir, Ben McLannahan discussing whistleblowers and the fake-account scandal at Wells Fargo writes: “One even wrote an email in exasperation to John Stumpf, the former chairman and chief executive. (He said he had not seen it.)” “Providing incentives for whistleblowers will improve bank culture” October 21.

Well I have been denouncing, for over a decade, among other with 2.375 letters to FT, this one not included, that the risk weighted capital requirements for banks concocted by the Basel Committee for Banking Supervision and supported by the Financial Stability Board, and not questioned by for instance IMF, is a dangerous monstrosity.

Not only does it distort the allocation of bank credit to the real economy, but it also does so for no good purpose at all, since major bank crises never result from excessive exposures to something that was perceived as risky when booked.

Perhaps one of these days its editor, and many of its columnists, will also argue they never saw these letters.

If someone who like me has argued consistently and extensively against these globally imposed regulations, cannot be helped by a Financial Times to at least obtain from the regulators clear and unequivocal the responses to his objections, then it could seem those regulators might also be using some very insidious pressures to silence those who “Without fear and without favour” are supposedly best equipped to give whistleblowers some voice.

@PerKurowski ©

October 21, 2016

Europe beware, Mario Draghi and his buddies are playing “she loves me - she loves me not” with your future

Sir, I refer to Claire Jones reporting on Mario Draghi’s difficulties on deciding what to do “to come up with a stimulus package that convinces markets the ECB is doing enough both to keep the fragile recovery on track and to keep hawks on his governing council onside”, “ECB has six weeks to update QE, says Draghi” October 21.

Mario Draghi was the former chair of the Financial Stability Board, and is the currently the President of the European Central Bank and chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision. No doubt that in the area of high-finance, Draghi is about as important as one can be… perhaps more important than one should be allowed to be.

Because Mario Draghi, though he might be a very knowledgeable technocrat, in the sense that he knows for instance that it can be quite risky for a bank to lend to an unrated SME, something with which all bankers would agree, is unfortunately not sufficiently wise to understand that what is for instance rated as super-duper safe AAA, is what can be truly dangerous for banks, precisely because bankers do also not think that to be dangerous.

And unfortunately Mario Draghi, like his regulatory technocrat buddies, seems also to have missed out on a Finance 101 course. That because seemingly he does not understand that when you allow banks to leverage more their equity, and the support these receive from society, with assets that are perceived safe than with assets perceived risky, banks will invest more than usual in what’s safe, because there is where it will obtain higher expected risk adjusted returns on equity. And the consequences of that are twofold, and both negative. First it leads to dangerously overpopulating the safe havens, and second, equally dangerous, especially for the real economy, to underexploring those risky bays where SMEs and entrepreneurs reside. 

As an example, the risk weight the Basel Committee has assigned to the financing of residential housing is 35%, while that for unrated SMEs is 100%. This causes banks to finance the basements where the kids can live with their parents, but not the necessary job creation required for the kids to be able to become themselves parents in the future.

It is truly shameful! Europe (and world) wake up!

@PerKurowski ©

In order to revive the pioneering spirit of America, start by kicking out dangerous risk adverse bank regulators

Sir, Gillian Tett writes: “The US used to be renowned for having a more flexible and mobile workforce than Europe; in previous centuries millions of people travelled in search of land, riches and jobs. But mobility has declined… [and] if mobility keeps falling, the sense of political polarisation and rage in [some] places will rise”, “The pioneering spirit America would do well to revive” October 21.

Ms Tett argues that this is all a bit counterintuitive since “the internet is supposed to have created a hyperconnected world that makes it easier to connect workers with far-flung jobs”.

Not necessarily, for instance we do not know how many can thanks to Internet be working somewhere else, without having to move. Also, much the same way internet can inform about existing job opportunities, it can make it much harder to sell those illusions of other green valleys that stimulated much mobility in the past.

As a possible countermeasure Tett advances that “The next president may also need a 21st-century version of the 1862 Homestead Act — which offered land to settlers who went west — and find new ways to encourage workers to relocate.”

Ms Tett should not forget that “land” to settlers is just a resource, just like bank credit is; and that we live in a world where mindless risk adverse regulators, with their risk weighted capital requirements, have de facto hindered credit mobility; telling the banks to stay where it seems safe, and not to go where it could be risky.

For the umpteenth time I quote from John Kenneth Galbraith’s “Money: whence it came, where it went”,1975:

“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.”

Clearly, the Basel Committee and the Financial Stability Board represent Galbraith’s “men of economic wisdom… [who serve] the needs of the respectfully affluent”.

So, if Ms Tett really wants the pioneering spirit of America to revive, then she should start by wanting to also allow credit to move freely; condemning the dangerous mumbo-jumbo preaches of the Basel Committee and the Financial Stability Board. That would in essence mean using one single percentage capital requirement for all assets, no matter in which risk-land these assets reside.

Unfortunately Ms Tett (and you too Sir) has been steadfastly mum on the issue of the regulatory distortion of bank credit, no doubt defending (“without favor”) her choice of “wise men” with their affluent and mostly Davos settled constituency.

“Wise men”? To know that unrated SMEs are risky to banks, is of knowledgeable men; but to understand that AAA rated assets are dangerous to bank systems, is of wise men.

@PerKurowski ©

October 20, 2016

The low interest rates on public debt that underpins so many requests for public investment projects, are artificial

Sir, Stefan Gerlach writes: “there are many public investment projects that have a higher return than funding costs, given the low level of interest rates. In this case, the idea that undertaking the investment project will raise income and make the economy better able to weather a future storm is not a debatable proposition from economic theory, it is a tautology.” “Even good economic stewards should heed sound arguments” October 20.

“Low level of interest rates”? Yes, but totally artificial! Those are the result of QEs; and of risk-weighted capital requirements for banks that so much favor the sovereign (0% risk weight) over We the People (100% risk weight)

Much of that non-transparent regulatory subsidy of the sovereign is paid by millions of SMEs and entrepreneurs, by means of less and more expensive access to bank credit. Take those clothes off the Emperor and you would see quite a lot of his frightening nakedness.

Gerlach also writes: For anyone interested in economic history, it is hard not to think about how the management of the financial crisis will be assessed by future monetary historians.”

Indeed, and one question those historians will surely make is: After about 600 years of banking, why did regulators in 1988 with Basel I, and later much more in 2004 with Basel II, introduce risk weighted capital requirements that so dangerously distorted the allocation of bank credit to the real economy? 

Their answer must be… The regulators, in their mutual admiration club so prone to group thinking, had not the faintest idea about what they were doing. For a starter they never defined the purpose of banks before regulating these; and to make it worse, they never did empirical studies on what has caused previous bank crises, something which was never ever what was ex ante perceived as risky.

@PerKurowski ©

What is puzzling is that regulators, like Mark Carney, cannot see they might also be a source of huge systemic risk

Sir, Ed Crook, with respect to Mark Carney, the governor of BoE and the chair of FSB arguing last year that regulators need to address climate change promptly, quotes Daniel Yergin with: “It was puzzling that a central bank would choose to identify investment in this sector as a major systemic risk to the global financial system, when there are so many other more obvious and immediate risks” “Energy expert dismisses warnings of carbon bubble” October 20.

On occasions I myself have proposed slightly less capital requirements for banks based on environmental sustainability and job creation ratings, so that banks earn a little higher risk adjusted returns on lending when they are doing what many of us consider as social good. But I have always done that with much trepidation; as it clearly requires a lot of hubris to think you could intervene so without causing any unexpected negative consequences.

But the Basel Committee and FSB regulators suffer no such inhibitions. They have gladly gone ahead with imposing credit risk weighted capital requirements, all without the slightest consideration to how that could (and is) dangerously distort (for no purpose) the allocation of credit to the real economy.

In my homeland (Venezuela) we often refer to those who have been awarded power (or have given themselves powers) in order to engage in dangerous activities, as being monkeys with razorblades. That description applies perfectly well to regulators who are not eve aware of that their actions might in itself constitute the largest systemic risk for the financial system (and for the economy)
@PerKurowski ©

For UK to re-engineer its growth model, it needs to de-engineer its loony risk adverse bank regulation model

Sir, Alberto Gallo writes: “At the heart of Britain’s problems is its unbalanced growth model, centred on London and financial services, a lack of investment in sectors that boost productivity rather than asset prices, and the resulting inequality… Britain needs a plan to re-engineer its growth model” “UK must rebalance growth model to steer past Brexit iceberg” October 20

That is a very clear definition of the problem. Unfortunately, among the proposed solutions, Gallo leaves out what needs to happen with bank regulations.

In short, for the umpteenth time, the risk weighted capital requirements for banks hinder these from financing the riskier future, having them only refinancing the safer past. The risk weights of 0% the sovereign, 20% the AAArisktocracy, 35% residential housing and 100% unrated SMEs and entrepreneurs shouts out what is wrong… unfortunately too many, FT included, are blind or deaf.

Unless Britain eliminates the distortions in bank regulations that work against productivity it is doomed to like old soldiers to slowly fade away… living up, little by little, all its past economic achievements.

@PerKurowski ©

World Bank’s “Ease of doing business” rankings, ignores the regulatory distortion of bank credit

Sir, Rachel Sanderson writes: “Competitiveness has improved… Last year Italy climbed nine places in the World Bank’s “ease of doing business” rankings”, “Italy’s business chiefs buckle up for a shock as reform vote looms” October 20.

That World Bank report, great in many ways, with respect to “getting credit” does unfortunately omit considering whether bank regulations distort the access to bank credit or not.

And so the real main-street value of any recorded “ease of doing business” improvements can come to naught, if, for instance SMEs and entrepreneurs do not have fair access to bank credit; something which they don’t have in Italy, or in any other country that has been smitten by the Basel Committee’s dangerous and foolish risk aversion.

The pillar of current bank regulations is the risk weighted capital requirements. It allows banks to leverage their equity and the support they receive from society differently depending on the ex ante perceived risk. Less risk, more leverage, higher risk adjusted returns on equity.

So the following risk weights should suffice to understand what is going on… that is if you want to understand.

Risk weights: Sovereign 0%, AAArisktocracy 20%, residential housing 35% and the unrated “risky” SMEs and entrepreneurs, the fundamental drivers of the economy, 100%. What more could I say? Perhaps reminding anyone interested that no major bank crisis ever has been caused by excessive exposures to something that was ex ante perceived risky when booked.

Had these regulation been in place when banks originally began to operate in Italy, none of them, and neither the economies, could have developed as they have. 600 years of real banking and soon 30 years of loony Basel Committee reigned banking. Italia capisce?

@PerKurowski ©

October 19, 2016

Compared to the poor of Venezuela, PDVSA’s bondholders, as a group and over time, have benefitted way too much

Sir, Eric Platt and Robin Wigglesworth write that PDVSA’s Rafael Rodriguez, Mr del Pino’s chief of staff, appealing to the investors to take part in the proposed swap said: “We hope investors will support PDVSA in the same way that we have supported them for many years”, “Caracas piles on pressure for $5.3bn bond swap” October 19.

For the poor of Venezuela, who demonstratively might not have received more than 15 percent of their per capita share of Venezuela’s oil revenues, that is an insult. I don’t care one iota about these bondholders; as a group and over time they have benefitted way too much.

As an example, Elaine Moore and Simeon Kerr when recently reporting on an upcoming international bond issue of Saudi Arabia wrote: “a banker not involved in the (US$ 20bn) deal, estimates that Saudi Arabia will price at 150bp above US Treasuries for a five-year bond and 160 to 165 for 10-year debt”. “Saudi debt pitch focuses on youth and reform” October 18. Sir, compare that with what the land that advertises itself to have the largest oil reserves in the world, has to pay.

Sir, very high risk premiums paid by a sovereign debtor, might evidence that a government and its financiers, are in cahoots for some mutually benefitting corruption.

And please do not tell us PDVSA is not Venezuela, as like if Aramco is not Saudi Arabia.

@PerKurowski ©

The UK’s Financial Conduct Authority has got to be kidding, or it is just too dumb. Your choice Sir?

Sir, Caroline Binham writes: “Britain’s financial watchdog is clamping down on investment banks’ “misrepresentation” and league table inflation as part of efforts to stamp out conflicts of interest to ensure clients, particularly small companies, get a fair deal.” “UK regulator clamps down on banks’ moves to manipulate league tables” October 19.

It sounds important and seems correct, but also like a very bad joke. Here is “Britain’s financial watchdog”, one that gladly allows risk weighted capital requirements to be imposed on banks; that which curtails the access to bank credit of small companies, now coming out as a champion for the SMEs. It has got to be kidding, or it has to be dumb. Your choice Sir?

@PerKurowski ©

Mark Carney: Who should offset the credit distributional consequences of the risk/future adverse bank regulations?

Sir, Martin Wolf mentions that BoE’s Mark Carney, noted monetary policy has distributional consequences but “it is for broader government to offset them if they so choose”. “The unwise war against low interest rates” October 19.

The risk weighted capital requirements for banks has distributional consequences too, in this case with respect of bank credit.

For instance, a risk weight of 35% when financing residential housing, and a risk weight of 100% for loans to SMEs, helps the young to have more availability of basements in which to live with their parents, than perspectives of a new generation of jobs.

And the blatantly statist 0% risk weighting of the sovereign, skews the distribution of credit away from the private sector and towards government bureaucrats.

So the question is: Should we now try to add a new layer of non-transparent complications so as to try to offset those credit distributional consequences, or should we simply get rid of risk-weighted capital requirements altogether?

I clearly favor the latter option but, doing so, I have to continuously confront those who like Martin Wolf know, quite correctly, that a below BB- borrower is risky (150% risk weight) but, unfortunately, do not have the necessary wisdom to fathom that what’s AAA rated, and therefore only 20% risk weighted, is, or will be made by this, much more dangerous to bank systems.

Wolf also states: “Lower interest rates need not worsen pension deficits; that depends on what happens to the value of assets held by pension funds. Normally, lower interest rates should raise the latter. What would lower both real interest rates and asset prices is greater pessimism about economic prospects. Central banks do not cause such pessimism but try to offset it.”

That is so very wrong! The only moment when the value of assets held by pension funds is really important, is when these have to be sold in the market in order to access purchasing power for the pensioners. And with these risk weighted bank regulations that impede banks from financing the risky future, and have these only refinancing the safer past and present, you can bet that the future economy will not be strong enough to pay well for those assets.

Of course Wolf might think it is the bankers’ duty to overcome such regulations, but that would be to ignore completely the overriding objective of bankers which is to maximize the risk adjusted returns on equity (and their bonuses).

PS. On the issue of low interest rates, let me as a financial consultant with extensive main-street experience, remind you that few things stimulate projects to advance faster from plans into income generating realities, than high interest rates. Low interest rates feed a lot of project execution laziness into the active real economy.

@PerKurowski ©

October 18, 2016

Could it be current bank regulators are not held accountable because their mistakes are just too big to fathom?

Sir, Jonathan Ford with respect to Wells Fargo’s “misdemeanors” asks “why supposedly competent managers failed to join the dots”; and correctly states that “one reason why public confidence in Wall Street remains so low… [is that the] bosses are not held accountable” “If no bank is ‘too big to jail’, Wells Fargo bosses must face the music” October 17.

Now with respect to banks, their purpose and their stability, there are two very clear dots:

1. If you allow banks to leverage their equity, or the support they receive from society, more with some assets than with other, then you will distort the allocation of credit to the real economy.

2. What is dangerous for bank systems, is never what is ex ante perceived as risky, but always either some unexpected event, or the build-up of dangerous excessive exposures to something that ex ante was perceived as safe but that ex post turned out not to be.

So, if regulators impose capital requirements that allow banks to leverage more with assets ex ante perceived as safe, then I would hold that is clear evidence of them not being able to connect even the most basic dots. Should they not be held accountable? Of course they should, but they aren’t.

I fully agree with Ford’s opinion that even though “little money was taken” in Wells Fargo’s “misdeeds” being discussed “that doesn’t diminish the bank’s culpability”

But could it be though that some mistakes, like those committed by current bank regulators, are just so big they can’t even be discussed? If so, we, and foremost the next generations, are doomed.

@PerKurowski ©

With respect to realizing bank regulators do not know what they’re doing, FT has clearly not reached maturity.

Sir, Janan Ganesh writes: “Maturity is the realisation that adults do not know what they are doing. Grown-ups are not omniscient, just fallible humans trying their best in a difficult world.” “The markets hold more sway than May” October 18.

Indeed that is why in a letter you published in January 2003, before I became de facto censored by FT, I wrote: “Everyone knows that, sooner or later, the ratings issued by the [human fallible] credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds.”

Here is the shorter version of the generally unknown lunacy of the current risk weighted capital requirements for banks:

1. If you allow banks to leverage their equity, or the support they receive from society, more with some assets than with other, then you will dengerously distort the allocation of credit to the real economy.

2. And all that distortion for nothing. What is dangerous for bank systems, is never what is ex ante perceived as risky, but always either some unexpected event, or the build-up of dangerous excessive exposures to something that ex ante was perceived as safe but that ex post turned out not to be.

You all in FT, grow up, mature, understand that current bank regulators haven’t the faintest on what they’re doing.

PS. Here again is a somewhat more extensive aide memoire on the monstrous mistakes of the current capital requirements for banks.

@PerKurowski Janan

Why is it so hard to understand that risks should not only be correctly perceived but also correctly considered?

Sir, Patrick Jenkins, discussing the Basel Committee’s push “to finalise another leg of post-crisis global financial reform” writes that “financial and economic stability is more important than a blinkered crackdown.”, “Basel Committee boss needs to reconsider hard line on reform” October 18.

What? “financial AND economic stability”? That’s a new one. Until now it has only been financial stability, which is why regulators (and journalists) have not cared to analyze how much current bank regulations distort the allocation of credit to the real economy. For instance Stefan Ingves, the chair of the Swedish Riksbank and of the Basel Committee, seems not to understand at all that the so much lower risk weight assigned to financing houses (35% in Basel II), when compared to the risk weight when financing SMEs (100%), has something to do with prices of houses going up and up, and the credits to SMEs going down and down.

Jenkins, on the possibility of part of the capital requirements to be based on the conduct of the banks, like misdeeds, argues: “The logic is flawed”, since “basing future capital demands on past fines duplicates the impact of a penalty”.

Indeed, but why Sir is it so hard for Jenkins, for the Basel Committee, for you and for all other in FT to understand that, basing capital requirements on ex ante perceived credit risks already cleared for by banks with interest rates and size of exposures, also “duplicates the impact” of perceived credit risks?

Is it really so hard to understand that any risk, even if perfectly perceived, causes faulty actions, if that risk is excessively considered?

@PerKurowski ©

FT: How much does the Basel Committee influence the property values in Europe?

Sir, I refer to FT Special Report on Property Europe October 18.

I wonder has anyone of the contributors to this report, or anyone else in FT for that matter, tried to figure out how much of the property values in Europe derives from the distortion produced by bank regulations?

Info: For the purpose of deciding the capital requirements of banks Basel II (and III) set a risk weight of 35% for when banks finance residential housing, and one of 100% for when banks finance the “risky” SMEs and entrepreneurs that are to help home buyers to find the jobs that will allow the house owners to pay their mortgages and the utilities.

Sure that has to mean something for the current and for the future value of properties in Europe. How much? I haven’t the faintest! Except that it’s a lot!

PS. In fact regulators make banks finance the “safe” basements where the young can live with their parents, not the new “risky” jobs they need Per Kurowski

@PerKurowski ©

October 17, 2016

How do politicians stand such failed technocrats as those in the Basel Committee and Financial Stability Board?

Sir, you quote BoE’s Mark Carney saying: “The objectives are what are set by the politicians. The policies are done by technocrats,” “Carney’s gentle reminder about BoE independence” October 17.

So let us assume that having banks perform the allocation of bank credit to the real economy as efficiently as possible, while at the same time ascertaining the stability of the banking sector, would be a reasonable objective set by the politicians. In fact I challenge you to find a politician who would dare to disagree with that objective.

But now let’s see what policies the technocrats, like Mark Carney, the current chairman of the G20s Financial Stability Board, and his colleagues on the Basel Committee have come up with.

They have imposed risk weighted capital requirements for banks that, allowing banks to leverage their equity and the implicit support these receive from society differently, based on ex ante perceived risks already cleared for, utterly distort the allocation of bank credit to the real economy.

And they designed that regulation based on the premise that what is ex ante perceived as risky is risky for the bank system, thereby completely ignoring all empirical evidences that clearly show that what’s really dangerous to the bank systems, is unexpected events and excessive exposures to what was ex ante perceived as safe but that ex post turned out to be very risky.

So the real question Sir would be: How do politician stand for such lousy technocrats?

@PerKurowski ©

October 15, 2016

Let’s see if Ms Tett’s recent enlightenment will now allow her to see the monstrosities of current bank regulations

Sir, Gilian Tett writes: “when the 2008 financial crisis hit, I decided that the only way for a country to avoid a massive banking crisis was to have regular, small bank failures. Frequent, tiny failures are perhaps the only thing that really stop regulators and bankers from getting too complacent.” “A vision of life through a dirty lens”, October 15.

In 2003, as an ED of the World Bank, in a workshop for regulators I argued:

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

It would seem there is some coincidence between what I said then and with what Ms Tett later opines.

Yet, over the last decade, in about a hundred of letters commenting on articles by Ms Tett, I have warned her, and you Sir, about the horrendous distortions that the risk weighted capital requirements for banks produce in the allocation of credit to the real economy; and of that all that distortion fulfilled no stability purpose at all.

But Ms Tett, and you Sir, has steadfastly refused to even acknowledge the problem. Perhaps it is my fault. Perhaps my arguments need to be presented with much more ego stroking than what I thought necessary when communicated with experienced and famous journalists/columnists, or with newspapers, especially one that proclaims “Without fear and without favour”.

So I am curious now to see if Ms Tett’s self declared enlightening experience at some “bars in Hamilton County”, will now allow her to apply what she learnt in the anthropology classes at university, in order to allow her to clean up her glasses on the monstrosities of current bank regulations.

@PerKurowski ©

I would never receive an Ig Nobel. The research I propose would cause no laughs, only tears

Sir, it was with great interest I read Tim Harford’s discussion on the Ig Nobel price “In praise of ridiculous research” October 15.

I immediately thought of researching: why regulators did not define the purpose of banks before regulating these; why regulators did no empirical research on what causes bank crises before imposing credit risk weighted capital requirements for banks; why regulators never considered that allowing banks to leverage differently their capital, and the support they received from society base on the perceived risk of assets, would distort the allocation of bank credit to the real economy; why regulators did not understand that further reducing the opportunity of those who are perceived as risky to access to bank credit, could only increase inequality… and so on.

That research sure sounds ridiculous, can't be!, but in fact it "might actually tell us something about the world".

But then I entered into Ig Nobel’ site “Improbable.com” and read: “ Improbable research is research that makes people laugh and then think”

Clearly I would not qualify. These regulatory failings have and are producing too much suffering, and so the research I propose would never elicit laughs, only tears.

@PerKurowski ©