November 29, 2016

Europe, Basel Committee’s risk weighted capital requirements for banks, is the kiss of death for your real economy.

Sir, Frédéric Oudéa, president of the European Banking Federation, writes: “The Basel Committee is targeting the degree of variability in how banks define the risks that ultimately determine their capital requirements. The highly technical nature of this topic should not divert attention from the fundamental question that lies behind the review: how, in the future, will European banks be able finance the economy and hence foster growth and raise employment?”, “New Basel banking rules’ impact on European economy” November 28.

But though Oudéa correctly argues that any review of current rules, “should not… disrupt the financing of the real economy”, he then does not tackle the “fundamental question”. That’s because be completely ignores, willfully or not, that the risk weighted capital requirements for banks seriously distorts the allocation of bank credit to the real economy.

In 1997 when getting some strange vibes about what was going on in the world of bank regulations I ended an Op-Ed with: “If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.”

The risk weighting has added a dangerous layer of regulatory risk aversion that causes banks to no longer to finance the “riskier” future, only to refinance the “safer” past or present. Since risk taking is the oxygen of any development, these regulations, if continued, represent a kiss of death for Europe… and others

Now, anyone should be rightly concerned with that getting rid of the risk weighting would create such bank capital shortages that it would put a serious squeeze on bank credit. As a solution I have suggested grandfathering current capital requirements for all the banks current assets, and then apply a fixed percentage, like for instance 8%, on all new assets. That should of course include the public debt, since a 0% risk weight for the Sovereign and 100% for We the People, is a pure and unabridged unbearable statism.

Now, if regulators absolutely must distort, so as to think they earn their salaries, I suggest they use job-creation and environmental-sustainability ratings, instead of credit ratings that are anyhow being cleared for by banks.


November 27, 2016

Why do bank regulators still allow few human fallible credit rating agencies to have so much regulatory influence?

Sir, I refer to Tim Harford’s “When forecasters get it wrong” and Gillian Tett’s “‘Shy’ voters: the secret of Trump’s success” November 26

What would have been the results if the election had been decided by a couple of polls or some forecasters?

I ask because bank regulators have still not been able to move away from that huge systemic risk of assigning so much importance to some few human fallible credit rating agencies.

In 2003 in a letter FT published I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds. Friends, as it is, the world is tough enough”

And as an Executive Director of the World Bank, while Basel II was discussed, time and time again I tried to alert to this systemic risk, all to no avail.

Sir, just imagine if the AAA rated securities backed with mortgages to the subprime sector had been able to continue for one year more before their gigantic faults were unveiled?

And again, why should some with an AAA rating and that because of that is already favorably treated by the market, have to be favored by regulators too? Is it so hard to understand that excessive favoring is dangerous too?


November 26, 2016

Spreads between sovereign debts are also a function of different bank capital requirements.

Sir, you write: “The spread between German 10-year bond yields and those of France and Italy has widened, reflecting concerns over political instability.” “US bond yields receive a boost from fiscal policy” November 26

That might be so, but you should not exclude that it could also have to do with the possibilities of changes in credit ratings, as these would impact the risk weights that partly determine the capital requirements of banks.

Germany is rated AAA with a zero risk weight and is far away from a higher risk weight.

France rated AA, has also a zero risk weight, but is closer than Germany to the next level of risk weights, 20%

Italy is rated BBB-, with a 50% risk weight, and if it loses that rating, its next risk weight would be 100%... with great consequences for banks.

Sir, as you see, the spreads between sovereign debts are not only a reflection of markets, but also a reflection of regulatory distortions.

How anyone can think that subsidizing the borrowings of a sovereign, with lower capital requirements for banks, is helpful for the real economy is beyond my comprehension, unless of course one is a runaway statist. 

At least in Greece, 100% risk weighted, banks have now to hold the same amount of capital when lending to that sovereign, than when lending to a Greek SME. Had it been that way all the time, Greece would not have suffered its recent crisis.


November 25, 2016

What about suing bank regulators for malpractice; and those who falsely promised us rose-garden type pensions?

Sir, Gillian Tett, pointing “to the US presidential election result”, writes it “has unleashed wild swings in equity and bond prices…. This could dent the fortunes of many of those who have a 401(k)… There is another reason why 401(k) holders might want to scan their statements: litigation… an explosion in class action lawsuits over alleged malpractice in these pension plans… excessive fees” “Lawyers shake up a sleepy pension world” November 25.

Let me put all that in a different perspective. The current risk weighted capital requirements for banks, introduced by the Basel Committee, represent a regulatory risk aversion that when layered on the banks natural risk aversion, signifies millions of SMEs and entrepreneurs will not have access to that bank credit that could help our real economies to move forward, in order not to stall and fall.

So when in twenty years time, all those 401(k) accounts do not hold what was expected on these, remember you wasted time suing for excessive fees, instead of suing against future depriving regulations. Regulators might argue they did not know… but should that be a valid excuse for those who present themselves to us as experts?

Why do those 401(k) fees that most certainly are too high, seem so especially high now? The real explanation is that the economies are not producing close to the seven percent real annual returns that too many institutions around the world assured pensioners they should expect on their savings. Those promising impossible rose gardens should also be sued… and for good measure include also those withholding truths.


November 24, 2016

Dominic Rossi: Populist bank regulation “strongmen” have promoted the state apparatus ever since 1988’s Basel Accord

Dominic Rossi writes: “The twin freedoms of capital and labour movement are fading, secular relics from a passing liberal age… The tendency of “strongmen” to use the state apparatus to conjure up growth will set our new course. The tedium of recent years, slow but steady growth, looks set to be dislodged by the seductive alchemy of a fiscally induced boom-bust cycle beloved by populists” “Dr Doom awaits seat at table as president-elect enjoys a free lunch” November 24.

Sir, I am sorry, we are already there. The Basel Committee for Banking Supervision’s technocrat strongmen, in 1988 decided that for the purpose of capital requirements for banks, the risk weight of the sovereign was 0% and that of We the People 100%. Could there be a more devious way of favoring the growth of a “state apparatus”?

Where would the rates on US Treasuries, those that usually serves as a proxy of the risk free interest rate be without this enormous regulatory subsidy? 

And that subsidy does not come free. Since decreed, it has been paid by millions of SMEs and entrepreneurs not getting access to bank credit on real undistorted market terms.

Rossi writes: “The repatriation of offshore US corporate balance sheets will help finance the good times” Yes and no! It might help finance good times for government if it causes more fiscal income, but let us not forget that those balance sheets might already be fully invested in US assets.

Rossi ends in: “Populism and strong currencies are rarely seen together for long.” Indeed it will, sooner or later, guarantee the dangerously overpopulation of what is decreed, perceived or concocted as safe havens… and when that happens everything will come tumbling down 


Over time simplewissers will always trump condescending besserwissers

Sir, Joan Williams writes: “working-class whites who feel abandoned by professional and business elites. A few…have noticed their pain, but for the most part elites’ social consciences have been aimed elsewhere, at ending racism or sexism, at environmentalism or eating food that is sustainably farmed.” “Cluelessness about class means we miss Brexit lessons” November 24

Unfortunately the working-class whites are just the tip of the iceberg. The day our young will realize that we their elders have gladly allowed banks to finance the construction of the basements where they can stay with us, but not the SMEs that could give them the jobs they need in order to also afford becoming parents, something really bad could happen.

Over the years I have had way too many opportunities for my liking to remember that not fully confirmed Viking tradition of the ättestupa, that cliff from which the elderly voluntarily jumped from when not being any longer useful to society.

And there are similar ones at Grand Canyon

November 23, 2016

How do you build a wall against the robots, the biggest threat for manufacturing workers here and there?

Sir, Martin Wolf quotes Richard Baldwin, author of the “The Great Convergence”, with that workers in South Carolina “are not competing with Mexican labour, Mexican capital and Mexican technology as they did in the 1970s. They are competing with a nearly unbeatable combination of US know-how and Mexican wages.” “Trump faces the reality of world trade” November 22.

That has an element to truth in it but, in many ways, the worst competition both Mexican and American manufacturing workers face in the future will come from technology, like robots.

How do you build a wall against job-stealing robots? No matter how that wall was built, your own consuming citizens would end up paying for it by paying higher prices.

One idea I have been toying with lately goes someway along the line of placing some type of payroll taxes on robots; first so as to permit us humans to be able to compete with these on a more level ground; and second so that with those revenues we could partially fund a Universal Basic Income, a Societal Dividend, which could provide us with a step-ladder to easier reach up to the growing gig-economy. 

That said, with respect to Trump and trade-deals I would just remind him of that no nation can be kept strong by cuddling up in comforting isolation and that probably the last legacy any President would want to leave behind him, is that of having weakened the Home of the Brave.

To top that up, quite gently, I would also point out to Trump that USA’s Declaration of Independence clearly states as one of its justifications, the need to stand up to “the present King of England… For cutting off our Trade with all Parts of the World”.

PS. In this context only as curiosa, the Declaration of Independence also mentions as a justification that “the present King of England…has endeavored to prevent the Population of these States… obstructing the Laws of naturalization of Foreigners; refusing to pass others to encourage their Migrations hither” 


November 22, 2016

If we want good governments, for all, we must lighten the politician’s redistribution profits… sorry I meant burdens

Sir, Janan Ganesh makes a very good case for a Universal Basic Income with his “Those who shout loudest are not always the worst-off” November 21.

At the end of it all, what Ganesh really discusses is the politicians’ efforts to maximize their own redistribution profiteering margins… something that skews it all.

Were there a UBI, then that would be an all citizen to all citizens affair, and governments would be elected, not based on who offers the most to some, but on the basis of who offers the best in what should be a governments primary responsibilities to all.

To diminish the redistribution role of governments will be no easy affair. That is not only because redistribution profiteers will naturally fight back; but also because after so many years of being brought up on the need to cry for a larger share of the redistribution pot, voters have become somewhat more genetically disposed to be beggars of favors.

Venezuela is a case in point, there its poor have received from the Chavez/Maduro governments, less than 15% of what should have been their per capita share of last 15 years of oil revenues. That is something probably true of most previous governments too.

But today, the most vociferous clamors against the government, come from a middle class that discovers having been placed on a road that’s heading in the wrong direction… its “the rage of dispossession” Ganesh writes about. The Venezuelan poor, well they have no time for anger, they have barely time to survive.


November 21, 2016

Math teacher Lucy Kellaway, before leaving FT, please explain to bank regulators the difference between a sum and an average

Sir, Lucy Kellaway stuns us announcing she will be leaving FT in order to teach some inner London students math. “It is almost goodbye from me and I want you to join me”, November 21.

Though I am not sure why she can’t write articles and teach math at the same time, her readers will sure miss her and her students most certainly welcome her.

That said, and given she must obviously know math and have some pedagogical proficiency explaining it, I sure wish that, before leaving, she would have a go at explaining to current bank regulators, the difference between a sum and an average.

In banking, the amount of credit and the interest rate charged on any credit is basically the result of the average bankers risk aversion to any average perception of risk. Were bankers to add up their risk aversion, then just the safest of the safest might get some tiny piece of credit and all slightly riskier would be totally left without.

Which is why, when bank regulators, to the bankers’ risk aversion to perceived risk, added by means of the risk weighted capital requirements for banks their own risk aversion to basically the same risk perception, they distorted all common sense out of the allocation of bank credit to the real economy.

For more than a decade I have tried to explain this to regulators, with no luck. Perhaps Lucy Kellaway would be able to find better words. We sure need our bank regulators to understand the simple fact that any risk, even if perfectly perceived, causes the wrong responses, if excessively considered.


November 19, 2016

Minimal capital requirements are a potent growth hormone for too big to fail banks.

Sir, I refer to Ben McLannahan’s “Kashkari scheme to end ‘too big to fail’ deserves a fair hearing” November 20.

Neel Kashkari, Jeb Hensarling and Thomas Hoenig are all correct in requiring banks to hold more equity… the minimum capital requirements of 1.6% and less, meaning leverages 62 times to 1, and more, have been the most potent growth hormones ever for the too big to fail banks.

But, since I sincerely believe that one of the greatest dangers for the banks, and for the real economy, is the distortions produced by risk-weighted capital requirements, were this source of distortion to be completely removed, then I think that a 8 to10 percent capital on all assets would suffice… especially if there is a clear reduction in the moral hazard producing government guarantees… especially if the prosecutors of wrong-doings begin to go after the responsible executives and not just shareholders’ capital.

That fixed capital requirement of 8 to 10% should of course also be applied to sovereign debt.

Though I am not a US citizen, I do have immense respect for USA’s Declaration of Independence and Constitution, and I must say, pardon me, that the risk weights of 0% the Sovereign and 100% We the People, reads to me like a slap in the face of the Founding Fathers.

PS. Clearly there is a conflict between wanting the banks to hold more capital, which would be the result of eliminating current risk weighted capital requirements, with wanting the banks to also serve the credit needs of weak economies. But there are ways to harmonize, like grandfathering any changes in the capital rules meaning leaving them as is for all the current assets of banks.

PS. You might ask yourselves what do I have to do with all this. Let me be clear, as a Venezuelan, and a Polish citizen, one whose father was liberated by American soldiers from a concentration camp in 1945, and as a grandfather of two Canadians, I am absolutely sure we all have much skin in the game with respect to how it goes for America… (And that goes for you too Sir… much more that you would naturally want to admit) 


Like bank-managed risk based capital models, should children also set the nutrition values that determine their diet?

Sir, James Shotter writes about differences of opinion between American and European bank regulators, with respect to allowing big banks to use their own risk models to help determine how much capital they should hold. “Bank rules benefit only US, says Deutsche chief” November 19.

Sir, knowing that banks have huge incentives to reduce the capital they need to hold, in order to by means of higher leverages obtain the highest returns on equity possible, that is perhaps the greatest, but far from the only display of naiveté by the Basel Committee and the Financial Stability Board.

It is like allowing children to set the nutritional values that will determine their diet like for chocolate cake, ice cream, broccoli and spinach.

In this discussion the relevant question is: “European regulators, do you believe European banks to be genetically or by some other reason more disposed than US bankers to resist the temptation of high returns on equity and bonuses?”

If the answer is “Yes”, so be it, and then the market will evaluate that answer. My bet is that the market will long-term prefer better capitalized banks… as well as trusting more regulating nannies that trust less the children in their care.

“Valdis Dombrovskis, the EU’s financial regulation chief, said… he would not accept changes that significantly increased how much capital European banks had to hold.”

Is that so? Does he really want US banks to become stronger than the European under his watch?

Clearly there is a conflict between wanting the banks to hold more capital with wanting the banks to also serve the credit needs of weak economies. But there are ways to harmonize, like grandfathering any changes in the capital rules meaning leaving them as is for all the current assets of banks, and, for instance, applying a fixed 8 percent capital requirement for all new assets.


November 16, 2016

How many billions would Facebook lose, were there no false or outrageously misleading news that attracts ad-clicks?

Sir, I refer to your “Face up to responsibility, Facebook and friends” November 16.

Indeed, Facebook, Google and friends, must now come to terms with how to manage fake news that are there only to attract ad-clicks. Clearly since they are also in the business of ad-clicks, and probably benefit on those clicks attracted by false news, they face serious, I would hold unmanageable, conflicts of interests.

To put the burden of this responsibility on Facebook and similar, would be something akin as having the banks calculating their own risk weighted capital requirements, like naïve bank regulators allow them to do.

I believe the most expedient way to resolve this issue, in a way that benefits most of us, is not to try to establish the veracity of any individual news, but to go after those sites that make it their business to attract ad-clicks by means of false or outrageously misleading news. 3 lunacies that have attracted more than 100 clicks, should suffice for a one month suspension.

Recognizing my human weaknesses I recently twitted: “Help, I can’t resist. More than an ad-blocker, I need a blocker of stupid/outrageous only designed to be clicked on stories”

PS. As a gentle reminder, in reference to the thousands of letter I have written to you on the distortions that risk-weighted capital requirements for banks cause, to withhold important information that could be true is, for a news organization like Financial Times, basically the same as presenting fake information.

Influential columnists, like Martin Wolf, are much more responsible for current state of economies than Donald Trump

Sir, Martin Wolf sneers disgustedly, with besserwisser gusto, at what president elect Trump has been proposing in order to tackle current difficulties, and in many cases brand new economic circumstances. “Trump’s false promises to his supporters” November 15.

Many, not all, of Wolf’s warnings are indeed very correct, though I must say his own lately what-to-do instead main suggestion, is not much convincing either. 

For governments to take advantage of low interest rates, to invest in infrastructure, is based on the premise that the interest rates are not low because of artificialities, like regulatory subsidies and QEs; and that the government is capable to embark efficiently on a major infrastructure constructions. Both those premises seem quite doubtful.

For instance last week Olivier Blanchard, the previous Chief Economist at IMF, when referring to my argument that current capital requirements for banks are lowering the interest rates of public debt, answered that the possibility of that needed to be researched, and, if true, the first order of business must be to eliminate the distortions.

I would of course also ask Martin Wolf how much he himself would be willing to invest in long term public debt at current rates… or is that supposed to be done solely by pension funds, insurance companies or profit-squeezed banks desperate for any solution that would keep them out of jail if events turn really sour?

Sir, Mr. Wolf would do well remembering that as a very influential columnist he is, until now at least, much more responsible for whatever conditions the world economies find themselves in than president elect Donald Trump. Where was Wolf in 1988 when the Basel Accord decided that the risk-weight of the Sovereign was 0% and that of We the People 100%? Where was Wolf in 2004 when Basel II assigned amazing much importance to the criteria of some very few human fallible credit rating agencies? And those questions are just for starters?

PS. What would I do? I would grandfather all current capital requirements for banks’ current assets, and then eliminate all distortions that stand in the way of SMEs and entrepreneurs having equal to all access to bank credit, foremost those that favor the government but also including those that favor the financing of houses. And then I would sit down and do nothing for six months, except of course trying to reach approval for a Universal Basic Income scheme that could benefit working and not working citizens.


November 15, 2016

What’s wrong with deregulating lousy regulations? Get rid of risk-weighted capital requirements for banks… but gently

Sir, Patrick Jenkins speculates on what Trump will do to bank regulations and regulators and how the latter would respond in America and in Europe. “Trump’s agenda on deregulation is as vital as his Nato policy” November 15.

I just know that with statist and distorting regulations, like the current risk weighted capital requirements, deregulation and getting rid of regulators, would be a good thing. But of course, that needs to be done with utter care, since you could otherwise easily make the cure worse than the disease.

The basic principle with respect to any changes in the capital requirements should be grandfathering, so that these only operate on the margin of the new, without shaking up the average of the old. Of course grandfathering should not be a tradable feature. If a European bank carries a low capital requirements mortgage on its book, and holds it that way until it runs out that is ok, but it should not be able to profit by selling low capital requirement’s mortgages to other more "needy" banks.


November 14, 2016

Odious bank regulations have hurt the working class the last decades more than Trump could do during four years

Sir, Lawrence Summers writes: “Not even US presidents with political mandates can repeal the laws of economics…Populist economics will play out differently in the US than in emerging markets. But the results will be no better”, “A badly-designed US stimulus will only hurt the working class” November 14.

But neither can almost self-appointed bank regulators repeal the laws of economic.

With their “more risk more capital – less risk less capital” technocrats send politicians and the general public the populist message that doing so, would help to stave of bank crisis without affecting growth.

For a starter that was pure nonsense since major bank crises are never the result of excessive exposures to something ex ante perceived as risky when incorporated on the balance sheet.

But much worse the populist technocrats assigned a risk weight of zero percent to the government and 100% to We the People.

Since that can only be based on the so statist and so false assumption that government bureaucrats know better what to do with bank credit than SMEs and entrepreneurs, productivity and job creation has of course been negatively affected.

The wealthy, at least in the short term, are better positioned to survive any dumb regulatory distortions than the working class. Long term, much less can the young, those who can only count on abundant risk-taking by the private sector to generate an economy that could serve their needs in the future.

Lawrence Summers is fixated on fixing the potholes of today, without concerning himself about who could use those pothole free roads efficiently tomorrow, generating profits and jobs.

Lawrence Summers also insists on that the public sector should take advantage of the very low interest rates to take on more debt, and do more infrastructure investments. That is because he resists the idea that those low interest rates might in much be the result of very costly regulatory subsidies to the sovereign, paid by us We the People, workers, SMES and entrepreneurs.

Sir, as I see, it if we insist going down the current bank regulations road, there will be an immense scarcity of basements where the unemployed young can live with their parents. 

PS. Here’s a link to what Professor Lawrence Summers answered me last week during IMF’s Annual Research Conference. 


November 13, 2016

No one saw how the liberal/free-market 1989 fall of the Berlin Wall was pitted against the statist 1988 Basel Accord

Sir, ‘end of history’ Francis Fukuyama, when referring among other to that “systems designed by elites — liberalised financial markets” writes: “Today, the greatest challenge to liberal democracy comes not so much from overtly authoritarian powers such as China, as from within” “US against the world? Trump’s America and the new global order”, November 12.

If Fukuyama, like most other discussing the post 1989 world had taken notice of the 1988 Basel Accord, their conclusions would have been quite different. As a minimum they would not be referencing a liberal world order.

That is because the introduction of risk-weighted capital requirements for banks, which set a risk weight of 0% for the sovereign and 100% for the We the (risky) people, has obviously nothing to do with a liberal order, and much more to do with runaway statism.

Sir, the so often mentioned and disavowed neoliberalism is simple froth on the surface. Pure and unabridged statism is the real undercurrent that guides our economies.

If only researchers, for instances at the IMF, had researched what those bank regulations have signified to lower the interests on public debt, and to make it harder for SMEs and entrepreneurs to access bank credit, our current financial policies, and consequently our economies, would have looked quite different.


Trump, though there’s reason for concern, shares some basic qualities that made the “Final Five” and America great.

Sir, Gillian Tett describing a clearly inspiring show by the US Olympic women’s gymnastics team, the “Final Five” asks: “Do they demonstrate discipline and ambition? Undoubtedly: if you want to teach a kid about triumph in the face of adversity Simone Biles’s life story is a good place to start: she overcame the challenges of a very tough childhood to win five Olympic medals” “What Trump can learn from the Final Five” November 12.

But at least in this respect Trump, though born with a silver teaspoon in his mouth, has certainly already demonstrated a willingness to take risks, to make mistakes, to try it again, and that go-get-it spirit that made the Five Final, and that helped make America what it is. If anything some could hold Trump has demonstrated a bit too much of those qualities.

Personally I pray Trump, as a President will want to reignite the building of America based on those qualities, and not just based on unproductive cronyism, which is a much too frequent reason for why some less deserving make it “Great” though not really the Final Five.

PS. Whether popular votes or electoral votes, no winning side has the right to ignore the other almost-half, though unfortunately it seems both sides would want to.

Tim Harford, lack of the limited diversity is bad, but much worse is groupthink within mutual admiration clubs.

Sir, Tim Hartford argues that one argument in favor of diversity is “to engage with people who may see the world differently because of their race, nationality, sexuality, disability or gender.” “Economics: a discipline in need of diversity” November 12.

That is a way too restricted view on the importance of diversity. As an Executive Director of the World Bank, back in 2002-04, I often argued with my colleagues that if by lottery we would get rid of two us with so much alike backgrounds, substituting the eliminated with a nurse and a plumber, we would not only have a more knowledgeable Board but, more importantly, a much wiser one. Not surprisingly there was a general lack of enthusiasm in the response to this line of argument.

Likewise, if bank regulators had beside those with banking experience included some with borrowing experience within their ranks, those who could attest to the difficulties they already faced accessing bank credit when perceived as risky (even if all these were white men) we would never have had to suffer the sheer idiocy of the current risk weighted capital requirements for banks.

Sir, so to stuff mutual admiration clubs that can easily fall trap to groupthink with those who meet the current limited meanings of diversity, will result in much less than what is really needed.


November 12, 2016

Compared to the Basel Committee’s statism and dangerous risk-aversion, Trump seems like a minor threat

Sir, John Kay discussing the election of Trump writes: “The post-cold war settlement that Francis Fukuyama characterised as the end of history — the combination of lightly regulated capitalism and liberal democracy — carried the seeds of its own destruction. The hubris that legitimized greed and proclaimed the primacy of shareholder value led to the global financial crisis of 2008 and, more generally, undermined the legitimacy of capitalist organization. “At last, the post-crisis political reckoning” November 12.

No! I hold instead that because of the Basel Accord of 1988, one year before the fall of the Berlin Wall, and which for the purpose of the capital requirements for banks set the risk weight for the sovereign at 0%, and for us We the People at 100%; the world has nothing to do with “lightly regulated capitalism and liberal democracy”; and all to do with “hubris [and ideology] that legitimized the greed and proclaimed the primacy [not of] shareholders" but of government bureaucrats, of the AAArisktocracy, and in this case of some naturally willing partners, the banks.

If the financial crisis of 2008 should have undermined anything, that is the statism and the risk aversion that resulted from allowing biased and inept technocrats to regulate.

We now live in a world in which the financing of basements, where unemployed youth can live with parents, is much favored over the financing of SMEs and entrepreneurs, those who could better generate the future jobs our young need to also afford becoming parents.

Sir, I fully agree that the election of Donald Trump as president of the USA, because of many of his utterances during the elections, raises some very serious concerns. That said I find it very hard to believe that he will be allowed to impact the world so negatively during the next four year, as the bank regulators have done during now soon three decades.

Risk-taking is the oxygen of any development. If you hinder it, the economy is bound to stall and fall.


Pragmatic entrepreneurs don’t stand a chance against committed statist ideologues

Sir, Anthony Scaramucci writes on Trump that “he is a pragmatic entrepreneur who understands economic incentives better than any head of state in modern history” “These are the policies to restore growth to America” November 12.

Hah! He wishes! Trump wishes! The sad truth is that pragmatic entrepreneurs don’t stand a chance against committed statist ideologues.

Where were those entrepreneurs who stood up and said “No!” in 1988, when bank regulators, deciding on the capital requirements for banks, set the risk weights for the sovereign, meaning government bureaucrats at 0%, and that of entrepreneurs at 100%?

Worse, where are the entrepreneurs who even after 28 years say “No!” to such odious discrimination?

Has Donald Trump any idea about how much more he has had to pay in interests over the years, only as a result of those regulations? I doubt it.

There are of course a lot of pragmatic entrepreneurs who would not object to this kind of regulations, but those are those practicing state cronyism.

So, as I see it government technocrats are bound to eat up Donald Trump alive! In fact, what could be worse, is that he could be so pragmatic so as to think that could be what’s most profitable to him.


November 11, 2016

Martin Wolf: You want it darker? There is some possible light out there, even during Trump time.

Sir, just one week before Leonard Cohen past away, bless his soul, I bought and heard his last record “You want it darker”. I then knew something very bad, but at the same time very beautiful, was happening to him. 

I bring this up because when I read Martin Wolf’s “The economic consequences of Mr Trump”, November 11, what immediately came into my mind was a “You want it darker Mr Wolf?” though without the beautiful component.

Sir, let us put all that doom and gloom darkness aside for a second and look at what good could happen.

Wolf writes: A second area of concern is financial regulation. Mr Trump has supported repeal of the 2010 Dodd-Frank Act, the regulatory response to the financial crisis. Many financial businesses hate it. Yet the question is whether it would be replaced by a more effective alternative or by a return to the pre-crisis free-for-all.”

“Free for all”? No! Let us be more precise about who those “all” were.

Bankers, who because of the risk weighted capital requirements, could fulfill their wet dreams of obtaining the highest risk adjusted returns on equity on safe assets.

Government bureaucrats, who because of the 0% risk weighting of the sovereign, would find it much easier to access credit to realize their occurrences.

House buyers since the very low capital requirements against the financing of houses, would fuel a credit boom that increased the values of their investment

And who paid for the freedom of the free? “Risky” SMEs and entrepreneurs who found their access to bank credit curtailed. Those renting and who missed out on the financing subsidies. And, since banks would no longer finance the riskier future and keep to refinancing the safer past, the young lost out big time on their opportunities to find the jobs they need in order to repay the staggering educational credits they have contracted.

Mr. Wolf, do you want it darker?

Last week, after more than a decade, I finally got some super-duper experts in the IMF to concede that perhaps the risk weighted capital requirements for banks, especially the 0% risk weight of the sovereign and 100% of We the People, could be distorting the allocation of bank credit, and also keeping the rates on public debt artificially low.

If that, something which by no means is reflected a Dodd-Frank Act that surrealistically does not even mention the Basel Committee, could translate into the elimination of the regulatory distortions of bank credit, then at least something economically very good and very important, could come out during Trump’s time.


Do not odious debts derive directly from odious credits or odious borrowings?

I refer to Jonathan Wheatley’s, Andres Schipani’s and Robin Wigglesworth’s FT: Big Read on the finances of Venezuela “A nation in bondage” November 11. I am taken aback by its distant coolness to what are life and death issues. “revenue-to-payments ratio”?

Sir, I have often asked, and not only in reference to Venezuela: does not what is being financed have anything to do with financing… is it only a matter of risk premiums being right? Let me go extreme to make my case. Should a bond issue that financed some extermination chambers be repaid? And should it then matter whether those chamber use Zyklon B, or the lack of food or medicines. Of course, whether those responsible for any deaths did it with intent, or only because of sheer ineptitude, matters a lot. But for informed financiers? How much “We didn’t know” can you really claim these days?

Sir, the world would be well served by having a Sovereign Debt Restructuring Mechanism but, for such a SDRM to also serve We the People well, and not only governments and their financiers, it would have to start to identify very clearly what should be considered odious debt derived from odious credits and odious borrowings.

And it should also define very clearly how much financiers could aspire to have their cake and eat it too. The article quotes Siobhan Morden, a Latin American strategist at Nomura saying “Investors who this year bought a PDVSA bond maturing in April 2017, for example, have made a 70 per cent profit, thanks to coupon payments and a price rise of 50 cents on the dollar as the bond approaches maturity” 

Two questions stand out: The first: should these bondholders be repaid the same as those who purchased the issue originally and held on to it? Perhaps yes, perhaps no. 

The second: Anyone out there thinks this 70% profit over a short period was just a result of a strict financial analysis, or did it contain some inside information that could affect its legal validity.

FT, yes I am Venezuelan, and so I might very well be too much on the crying side on this issue, but what would you in FT say if UK fell into the hands of a totally inept government and this one is kept in place by financiers out for a quick buck?

Sir should only a non-payment cause a default of sovereign bonds? Are there not implicit moral negative covenants that could be called on by the world, such as not letting your people starve only to serve the debt?

PS. Just to make my arguments clearer and therefore hopefully stronger in Venezuela I have been on this issue long before the Chavez/Maduro times.


November 10, 2016

Who should we most blame for distorting risk weighted bank capital requirements; central banks or politicians?

Sir, John Authers writes “Blaming central bankers, as many of the people behind the UK and US populist revolts tend to do, misses the point. The loose monetary policies of the past eight years helped deepen inequality by raising the wealth of those already with assets, without breathing sufficient life into those economies. But central bankers were for the most part following these policies to buy time for politicians to take the needed longer-term measures.”, “A bonfire of the certainties” November 10.

And Authers’ pities the “Central banks [that] have looked increasingly uncomfortable with their new role, while each fresh dose of monetary easing has had less impact than the one before.”

But what Authers’ does not do is to mention the bank regulations promoted and sheltered by central banks and which distorted the allocation of bank credit to the real economy. The statism, the silly risk aversion, the discrimination against the risky and the all that for no good safety reason, and that is imbedded in that piece of regulations, will go down in history as a shameful mistake, and disgrace all those who by commission or omission are responsible for it.

I ask, are central banks really auhorized to independently distort bank credit allocation

At the very end of the recent 2016 Annual Research Conference, none other than Olivier Blanchard, the former Chief Economist of the IMF, admitted that indeed more research was needed to better understand the underlying factors for the trend to lower public debt interests that can be observed the last 30 years; and that this trend might very well be explained to an important extent by current bank regulations.

When that research ends up showing we have for decades been navigating with a subsidized public borrowing rate as a proxy for the risk free rate, a financial compass distorted by the Basel Committee’s magnetic field, there will be many questions. Among these, why did FT silence more than 2.000 letters I wrote to it on this issue.

PS. The origin for this regulatory risk weighting can be found in Steven Solomon’s The Confidence Game” 1995. “On September 2, 1986, at the Bank of England governor’s official residence… when the Fed chairman Paul Volcker sat down with Governor Robin Leigh-Pemberton and three senior BoE officials, the topic he raised was bank capital”


FT, the Basel Committee has already done more harm to the global liberal order than what one or two Trump could do.

Sir, you write: “The most powerful nation on Earth has elected a real-estate mogul with no experience in government, a self-styled strongman, contemptuous of allies, civil discourse and democratic convention. Barring a protean change of personality, Mr Trump’s victory represents, at face value, a threat to the western democratic model.” “Trump’s victory challenges the global liberal order” December 10.

Let us pray we’re all wrong about our quite natural concerns; for a starter the election result was quite a surprise for most of us, probably even to Mr. Trump.

Nonetheless, as I have been arguing for years, the Basel Accord, and its ensuing bank regulations has already endangered “the global liberal order”, probably much more than what one or a couple of Trumps could do.

First, for the purpose of setting the capital requirements for banks, it determined the risk weight for the sovereign to be 0% while that of We the People was set at 100%. That de facto means that regulators believe government bureaucrats can use bank credit more efficiently than for instance SMEs and entrepreneurs. What on earth has that to do with a global liberal order? Those who still argue the 1989 fall of the Berlin Wall heralded the collapse of communism, must have no idea about 1988 Basel Accord.

And setting the capital requirements for banks based on ex ante perceived risks, risks that were already cleared for by bankers by means of the size of exposures and interest rates, introduced monstrous distortions in the allocation of bank credit to the real economy. What on earth has such distortions to do with a global liberal order? 

And the doubling down on ex ante perceived risk, meant that the more risky-bays where SMEs and entrepreneurs reside, were to be explored much less; while dangerously overpopulating “safe” havens such as sovereigns, AAA rated and housing finance.

What on earth has silly risk aversion induced by regulators to do with a global liberal order that should thrive on risk-taking ?

Also, by much favoring The Safe’s access to bank credit. it negated The Risky many of those credit opportunities that could have helped them to realize their dreams, and helped us with new jobs. What has such odious regulatory discrimination to do with a global liberal order?

Sir, on all this You and the whole Financial Times have seemingly decided to keep mum. It seems a bit suspicious. Though you proudly state “without favour” in your motto, could it be FT is in reality harboring a very pro-statist and interventionist heart?

PS. Sir, please don’t insult our intelligence by telling us this was all done in order to make our banks safer. You know very well that no major or even minor bank crisis has been caused by excessive exposures to what has been ex ante perceived as risky.


November 09, 2016

It is time for America to ask bank regulation’s risk weights of 0% Sovereign and 100% We the People, to take a hike!

Sir, Martin Wolf, in reference to the United States writes: “In the country of the blind, the one-eyed man rules… the next administration will take over a country with mediocre growth of productivity, high inequality, a growing retreat from work and a declining rate of creation of new businesses and jobs… loss of dynamism… business fixed investment has been persistently weak… rise of new regulatory barriers is disturbing.” “An economic in-tray full of problems” November 9.

Of course, as usual, obsessively, Wolf says not a word about the possibility that the risk weights of 0% sovereign, 20% AAA rated, 35% residential housing and 100% SMEs, set for the purpose of defining the capital requirements for banks, are distorting the allocation of bank credit to the real economy, with disastrous consequences.

At least last week, during IMF’s Annual Research Conference, at the very end of the conference, none other than Olivier Blanchard, the former Chief Economist of the IMF, admitted that: indeed more research was needed to better understand the underlying factors for the trend to lower public debt interests that can be observed the last 30 years; and that this trend might very well be explained to a certain extent by current bank regulations.

When the truth about the risk weighted capital requirements for banks unravel, I wonder how Mr. Wolf is going to explain his and FT’s silence on my thousands of letters.

By the way, after yesterdays American election results, is it not high time for the Home of the Free and the Land of the Brave to ask those risk weights of 0% Sovereign and 100% We the People, to take a hike?

PS. What caused the unexpected election results? I really don’t know, I am not American so I did not have to vote (phew what a relief) but the irritating smugness of technocrat and media besserwissers, sure must have played an important role.

PS. I forgot, fairly recent I twitted: “As I see it there's one vote for the next 4 years, and then there’s one for the next 40. The latter could be for Gary Johnson”


November 07, 2016

Europe, America, G20, don’t walk away from Basel Committee risk weighted bank capital regulations…you’d better run!

Sir, John Dizard writes about a “meeting of the Basel Committee on Banking Supervision on November 28 and 29… is scheduled to agree a “standardised approach for credit risk” and impose limits on the use of internal models. The idea is that banks in the G20 countries, a group of the world’s most powerful economies, will not engage in regulatory arbitrage, or international game playing that results in a lowering of credit standards.” “Basel’s background noise for the next crisis”, FTfm, November 7.

Of course, the Basel Committee should prohibit banks from using their own models to define their own capital requirements; allowing it, is like letting children use their own nutrition models to pick between chocolate cake, ice cream, broccoli or spinach.

But, to impose a regulators’ defined “standardised approach for credit risk”, is just as loony; it suffices to have a look at what the standardized risk weights included in previous Basel Committee regulations.

One example: Basel II, 2004, set the risk weight for an asset rated AAA to AA at 20% while that of an asset rated below BB- was set at 150%. Anyone believing that what is rated as highly speculative, almost bankrupt, below BB-, is more dangerous to the bank system than what is rated AAA to AA, must be smoking some weird stuff.

Sir, unfortunately Dizard, as most of you in FT, shows little understanding for the whole issue when he questions: “under the current version of the Basel “standardised approach”, unsecured lending to a non-public, below investment-grade corporate borrower requires the same bank capital commitment as project financing secured by assets, liens on equity and cash lockbox arrangements. Based on the past low loss rates for project lending, that is between two and three times as much capital as the risk should require.”

If that is so, should not the difference in risk reflect itself sufficiently in the interest rate and the size of exposures? Why should that same perceived risk also have to be reflected in the capital? Does Dizard (or you Sir) not know that any risk, even if perfectly perceived, leads to the wrong decision if excessively considered?

Sir, ask Dizard: “Why should a bank when lending to a below investment-grade corporate borrower have to hold more capital than when lending to “safe” projects? Will not the “risky” corporate anyhow get less credit and pay higher risk premiums than the “safe” project? 

Sir, again, for the umpteenth time, bank capital should not be required to cover for expected risks; it should be there to cover for the unexpected.

Sir, again, for the umpteenth time, the risk weighted capital requirements for banks have introduced absolutely insane distortions in the allocation of credit to the real economy. If Europe, America, G20, or the whole world do not run away from the regulators’ senseless doubling down on ex ante perceived risk, their economies are doomed to stall and fall.


November 06, 2016

With so much regulatory distortion, why is FT so fixated about the low nominal real interest rates on public debts?

Sir, you write: “It is a puzzle why the Fed is so keen about raising US interest rates… Central banks should err on the side” “The prevailing case for caution by central banks” November 5.

Sir, may I say you keep on being fixated on the nominal real interest rates, unable to see the real real-nominal interest rates.

Would any serious economist discuss gas prices at the pump ignoring taxes? No!

Would any serious economist discuss milk prices ignoring various subsidies? No!

Then why have almost all serious economists, FT included, only been discussing low real interest rates on public debt ignoring the regulatory subsidies?

In 1988, the Basel Accord, Basel I, for the purpose of setting the capital requirements for banks, decided that the risk weight of the sovereign was 0% and that of We the People 100%.

That would hence mean that banks would be able to leverage much more their equity, and the value of any explicit or implicit government guarantees they received, with loans to the public sector than with loans to the private sector.

That would hence mean banks could obtain higher risk-adjusted returns on equity when lending to the public sector than when lending to the private sector.

That would hence mean that the interest rates of bank loans to the public sector included a regulatory subsidy.

That would hence mean that the subsidies for the access to bank credit by the public sector was to be paid by taxing the private sector with more restricted or more expensive access to bank credit.

And that should hence have meant that in order to know the real real-rate on public debt, to the nominal rates, we would have to add the cost of the regulatory taxes paid by the private sector.

That has not been done! All references to the interest rates of public debt have been limited to using the nominal rates. That has led experts like Lawrence Summers, Lord Adair Turner, FT's own Martin Wolf and many other, to argue that the public sector should take advantage of extraordinary low rates in order to finance public investments, like in infrastructure.

That is so wrong! If we include the economic cost of restricting the access to bank credit over the decade and around the world, for many millions of SMEs and entrepreneurs, the current real real-interests rates on public debt could in fact be the highest ever.

So, if the Fed, ECB or any other central bank, really wants to lower the interests in order to stimulate the real economy, then they should begin by asking bank regulators to take away those so costly subsidies of public debt.

Sir, You if anyone should know I have been raising this issue for a long time; in 2004 in a letter you published I wrote: “How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

But sadly my arguments have until now fallen on deaf ears. Perhaps I never managed to explain myself correctly in those thousands of letter I have written to FT over the years about the distortions that are caused by the risk-weighted capital requirements for banks.

But now, at long last, I might have been able to reach through, at least to the IMF. At the very end of the recent 2016 Annual Research Conference, none other than Olivier Blanchard, the former Chief Economist of the IMF, admitted that indeed more research was needed to better understand the underlying factors for the trend to lower public debt interests that can be observed the last 30 years; and that this trend might very well be explained to an important extent by current bank regulations.

I pray that translates, as fast as possible, into many of IMF’s PhDs and other researchers trying to figure it out. It is absolutely vital. Public debt usually serves as a proxy for those risk-free rates that so many of our market and financial decisions are based on.

We have all a responsibility towards our grandchildren to help our economies to navigate towards better waters and, if we are to succeed doing that, we need our compasses or GSPs to be functioning correctly.


November 02, 2016

To make saving our pied-a-terre affordable, we need to keep the climate-change-fight profiteers at bay

Sir, I refer to Martin Wolf’s “Inconvenient truths and the risks of denial”, November 2.

I do not read scientific projections on global warming, it suffices me to see what harm is done to our delicate pied-a-terre to know its wrong and that it should stop. But I also know that could be a much costlier than needed process, if we are not able to keep the climate-change-fight profiteers at bay. And I also know that we would be much more effective in our efforts if we could engage other social causes in the quest, like that of decreasing inequality.

That is why I am all in favor of for instance very high carbon taxes, with all its revenues paid out to citizens by means of a Universal Basic Income. That would decrease carbon emissions, allow supplier of cleaner energy sources to compete more and, to top it up, help our economies by reviving demand.

Sir, all those incredible over 500 percent gas/petrol ad valorem taxes in Europe, would do much better placed in the pockets of European citizens, than managed by European bureaucrats, capturable by their own and other special interests.

@PerKurowski ©

FT whoever replaces Mark Carney at BoE, pray he knows more about life on Main Street… and is a bit wiser.

Sir, you write: “Central bankers should not be above criticism. But the idea that a central bank governor should be vilified for warning about disruption that he then helped to prevent is absurd”, “Carney asserts his authority at the BoE” November 2.

Indeed, but when a central banker is also part of the regulatory technocracy, as Carney being the current chair of the Financial Stability Board is, then anyone should have the right to criticize him if it is clear he does not know what he’s up to.

I have denounced what I believe to be many serious mistakes/confusions with the current risk weighted capital requirements. Let me here just reference one.

Basel II set a capital requirement for banks of 12% when lending to anything below BB- rated, but only one of 1.6% for anything rated AAA to AA. That mean regulators allowed banks to only leverage about 8 times to 1 their equity when lending to the below BB- rated but 62 times to 1 with AAA to AA rated assets.

Sir, if you think that reflects the real risks of bank crises to occur, then I must hold that you have never walked on Main Street.

Also, there are so many, even in the Financial Times, who argue that governments should take advantage of the very low interests on public debt in order to finance for instance big investments in infrastructure. Sir, those low “real” rates might be the highest real rates ever. Basel regulations subsidizes infallible 0% risk weighted sovereigns, at the dangerously high cost of causing banks to finance less the riskier 100% risk weighted SMEs and entrepreneurs, those who could provide us with our future incomes, and governments with its future tax revenues.

Sir, pray you get central bankers that are not solely desk- or knowledge bound, but that have some Main-Street experience and some wisdom too.

PS. Of course the same applies to other too. Like Mario Draghi and Stefan Ingves.


November 01, 2016

The Main-Street understanding world’s MPCs most need, is that of the discriminated against bank borrowers, like SMEs

Sir, Huw van Steenis writes: “The private sector’s demand for loans, banks’ profitability, capital adequacy and risk aversion — all these affect not only financial aggregates but also financial wealth and the real economy through a variety of channels. Overlooking how banks function means the models that central bankers have relied upon are, by construction, overly simplistic fair-weather versions only.” “Time to put financial frictions at the heart of central bank models” November 1.

Of course, central banks must wake up to the frictions and distortions caused by the risk weighted capital requirements for banks. Though that is probably not what van Sttenis refers to, because, if he did, he should be very careful. He might wake up bankers, his bosses, from their realized wet dreams of earning the highest risk adjusted rates of return on equity, when financing what’s perceived as the “safest”

But Van Steenis also writes: “Every MPC should have members who have a real-world understanding of the plumbing of financial intermediaries. It’s time to put financial frictions into macroeconomic models.”. And Sir No! Careful there! “Huw van Steenis is the global head of strategy at Schroders”; and the Main-Street understanding Monetary Policy Committees around the world most need, is that of discriminated against bank borrowers, like SMEs and entrepreneurs.

@PerKurowski ©