January 29, 2017

Beware of Brexit EU. Britain might not use Euros, but that does not mean the Euro is totally independent of Britain

Sir, Tim Harford writes: “Imagine detaching your steering wheel and flamboyantly discarding it as you race headlong towards your opponent. Victory would be guaranteed. Nobody would drive straight at a car that cannot steer out of the way.”, “Brexit as a game of Chicken” January 28. 

It reminded me that in 1998, on the eve of the Euro, I wrote an Op-Ed titled “Burning the bridges inEurope”, because “in all the abundant legislation that regulates this process, there is no mention whatsoever of how to manage the withdrawal or future regret of any of the union’s members.” That sure was something like discarding the steering wheel.

But looking back at the Euro now, I have also come to believe that part of the glue that has helped the Euro hold together, has to do with the feeling that Britain in EU would be able to help arbitrate and reduce the frictions between Euro’s so dissimilar members.

Therefore the Eurozone should very carefully consider what a bad Brexit would do, not solely to the EU, but also to the Euro. 

Sir, Hartford also writes: “May badly needs to sign a deal with someone –Trump, perhaps, or China’s president Xi Jinping. But neither Trump nor Xi badly need to sign a deal with her. This is not a great starting point.”

I am not so sure about that. The way Trump seems to be digging himself into a hole, he might very well need to sign a big deal with someone. Perhaps “A New English Language Empire”?


January 27, 2017

Rising productivity cannot result when regulatory risk aversion is distorting the allocation of bank credit

Sir, Martin Wolf writes: “UK’s future income will depend on rising output per hour” “The productivity challenge to the British economy” January 27.

To be able to increase productivity is not a God given right. In general it requires a lot of risk-taking, like loans to SMEs, entrepreneurs and start-ups. The risk weighted capital requirements for banks represents a big effective wall against such risk taking. But on that Wolf has steadfastly kept mum.

PS. I dreamt last night that I had finally gotten an answer from the regulators on my questions… but then I woke up L


January 25, 2017

Is the “permissive consensus” that allowed dumb hubris-inflated elites to regulate banks over? Doesn’t look like it

Sir, Emmanuel Macron, a candidate for the French presidency writes “The permissive consensus that allowed Europe to be governed by the elite for the elite is over” “Europe holds its destiny in its own hands”.

Starting 1988 regulators introduced risk weighted capital requirements for banks, and in the process inexplicably decided on such outlandish risk weights as 0% for the Sovereign 20% for the AAA-risktocracy, 100% for We the People, and 150% for those poor bastards rated below BB-, those who of course already had their access to bank credit basically reduced to nothing.

With that the regulators introduced statism and a risk aversion that now have banks no longer financing the riskier future, only refinancing the safer past and present. And all that for nothing, since it is never what is perceived ex ante as risky that causes any bank crises. That dishonor belongs to unexpected events, to criminal behavior, or to something ex ante perceived as very safe turning out, ex post, as being very risky.

Macron writes: “The French people did not emancipate themselves from absolute monarchy in 1789 with the declaration that “the principle of any sovereignty lies primarily in the nation”. True emancipation arrived in 1792, when citizens across France rose up to defend the revolution against foreign kings.” Macron is probably not aware of that, thanks to experts, French banks can now hold much less capital when lending to many foreign sovereigns than when lending to French SMEs and entrepreneurs.

But those crazily failed bank regulators keep on regulating, as if nothing, and still captured by a monstrously large confirmation bias. For instance this week Mario Draghi, the former chair of the Financial Stability Board, the current chair of the Group of Governors and Head of Supervision in the Basel Committee for Banking Supervision, ranked in 2015 by Fortune as the as the world's second greatest leader; without the blinking of an eye gratefully received the (bit obscure) “Premio Camillo Cavour” 2016, for services to Italy and Europe.

Would Italy and Europe be in its current difficulties had their “safe” sovereigns and their “risky” SMEs and entrepreneurs have had the same risk-weight? Absolutely not!

PS. Sir, ponder on that perhaps your own permissiveness on these regulations, perhaps out of a wrong sense of solidarity or awe with experts, helped cause the 2007/08 crisis, and the slow economic growth thereafter; that which (much much more than Russians hackers) has led to Donald Trump becoming president. How do you feel about that?


January 24, 2017

Martin Wolf, I totally agree it is not nice where we find ourselves, but you’re part of how we got here… I am not!

Sir, Martin Wolf writes: “Who would have imagined that primitive mercantilism would seize the policymaking machinery of the world’s most powerful market economy and issuer of the world’s principal reserve currency? The frightening fact is that the people who seem closest to Mr Trump believe things that are almost entirely false… Protection just helps some businesses at the expense of others… The rhetoric of “America First” reads like a declaration of economic warfare.”"Trump and Xi battle over globalization" January 25.

Indeed but then again: “Who would have imagined that primitive statist technocrats would seize the regulatory machinery of banks of the world? And the frightening fact is that the people who seem close to the Basel Committee, like Martin Wolf, also believe things that are entirely false, like that what is perceived as very risky is very risky to our banking system… which only helps to protect the access to bank credit of “the safe”, at the expense of “the risky”…The rhetoric of “We Regulators must make our banks safe” reads like a declaration of economic warfare.”

Sir, I am sure that had the world not silently accepted the risk weighted capital requirements for banks in 1988, which introduced such obnoxious statist concepts of assigning a risk weight of 0% to the Sovereign and 100% to We the People; and then in 2004 going on to assign a such a meager risk weight of 20% to what was AAA rated… the subprime crisis would not have happened… Greece would not have received so much in loans, and Trump would still busy himself with hotels and casinos.

Martin Wolf, I understand you are also a victim of that confirmation bias that have swept the regulatory circle, but your silence on the distortion in the allocation of bank credit to the real economy, makes you, ever so little, an accomplice of Trump’s rise to the presidency of America… so don’t just wash your hands like any Pilate.

PS. “rules-based trade” is not really “open markets”


FT, you have good reporters; send them to the Whitehouse to pose Trump some constructive questions on protectionism.

Sir, you write: “Forcing industrial output to return to the US is likely to create work for US-based robots rather than workers” “Take the US president’s protectionism seriously” January 25.

Precisely, that is what I have tweeted for some time now, and on which I have written some letters that you have steadfastly decided to ignore, like those on the subprime banking regulations, without thinking of it as any type of censoring, or without “without favour”.

But, without resorting to qualifying Trump’s protectionism as “profoundly retrograde” which means so little, which sounds so besserwisser, and which can only insult those who are then implied of having voted for a “retrograde”, why don’t you use your voice to send a journalist to Washington to ask of the Whitehouse, directly, some constructive questions?

For instance: “With current and future actions taken against foreign suppliers, in order to make America great again, what ratio of new employments of humans to robots do you foresee? How many robots have substituted for humans in jobs in USA during 2106?

And, if there’s a chance and a will, dare ask: Why does the Whitehouse think that trade protectionism is worse than that financial protectionism that is imbedded in the current risk weighted capital requirements for banks?


Financial protectionism could be just as bad or even worse than trade protectionism

Sir, I refer to the so plentiful anti-trade-protectionism writings, in FT and everywhere, and which all warn about the dangers of what Big Bad Donald Trump is up to. Many of these, not all, are solidly argued. Yet these contrast so much with the almost absolute silence against the financial protectionism that is imbedded in current bank regulations.

The risk weighted capital requirements for banks allow banks to leverage more with assets perceived, decreed or concocted as safe, than with assets perceived as risky. That means banks will earn higher risk adjusted returns on equity on the “safe” than on the “risky; so banks will favor with credit or investments what’s safe over what’s risky.

Is this not how it always is. Yes but before the introduction of these capital requirements the perceived risk was cleared for by the size of the exposure and the risk premiums charged. Now when capital requirements are also based on the same perceived risks, the effect of these in the allocation of bank credit to the real economy are augmented and so distort.

Here are some risk-weights of Basel II. Sovereign=0%, AAArisktocracy=20%, residential housing=35%, not rated “We the People”, like SMEs=100%, below BB-rated=150%.

Those who do not see how those with lower risk weights have their access to bank credit protected, against that of the risky, are not interested, dumb or trapped, almost irreversibly, by the mother of all confirmation biases.


January 20, 2017

Why has Ms. Tett waited until now when President Trump is inaugurated to so champion the importance of start-ups?

Sir, for me it is somewhat surprising to read Gillian Tett’s “Start-ups will make America great again” January 20. Of course she is correct in what she writes there, but why did she have to wait until now for recommending Trump to “think small — in a big(ly) way”?

I ask because over the last decade I must have written at least a 100 letters in commenting on Ms. Tett’s articles I have argued the vital importance for the real economy and job creation, of the start-ups and SMEs; and also how risk weighted capital requirements for banks distorts the allocation of bank credit, effectively reducing bank credit availability for those perceived as risky, like SMEs, like start ups. But, during all those years Ms Tett has kept mostly silence on this, and so why right now?

Why has she also not told Mark Carney, Mario Draghi, Stefan Ingves and so many others about this? If in USA, SMEs and entrepreneurs have since Basel II of 2004 found it harder than ever to access bank credit, even worse are the conditions these borrowers have to face in Europe. And by the way, when will Ms Tett also remind those gentlemen who are all involved in bank regulations, that these SMEs / start-ups really never pose major dangers to the bank system, and that precisely because they are ex ante perceived as risky?

Since the introduction of Basel II millions of SMEs, entreprenuers and similars around the world have been denied the opportunity to that bank credit that could have helped our young to find jobs and not have to settle to live with their parents in basements. Well-done Basel Committee!

Finally, does Ms. Tett really need researchers from McKinsey to wake her up on what robots or automation could signify to jobs in general… is this really new news? And where has McKinsey spoken out against regulatory distortion of credit?


January 19, 2017

Any new social contract for America needs to rectify and use equal risk weights for Sovereign and We the People

Sir, Anne-Marie Slaughter writes: “Where Roosevelt echoed Alexander Hamilton, emphasising a contract between citizens and government, Mr Ryan puts “society, not government, at the centre of American life”. Government exists to support citizens in solving their own problems. They agree on the imperative of genuinely equal opportunity for all but disagree on the scale and scope of government action necessary to achieve it.” “The world awaits America’s new social contract” January 18.

Since 1988, with the Basel Accord, for the purpose of setting the capital requirements for banks, the risk weight for the Sovereign, meaning the State, was set (by obvious statists) to a mindboggling zero percent. While the risk weight for We the Not-rated People, was determined to be 100%.

That subsidizes government debt, which is paid by lesser access to bank credit for SMEs and alike.

That, since it implies that government bureaucrats know better what to do with bank credit, puts the government squarely at the centre of American life.

Worse yet, American bank regulators have also extended the courtesy of lower risk weights to many foreign sovereigns, and to the AAA-risktocracy, wherever it lives.

I would prefer for instance a 75% risk weight for We the People and one of 100% for the sovereign but, if that’s not possible, the least the Ryans in America should do, is to be sure the state and citizens are weighted equally.

Sir, when I write this, there’s only one day left before 100% risk weighted citizen borrower Trump passes, as President Trump, to head the zero risk weighted borrower.


January 18, 2017

Italy, there are very important lessons from the bank crisis that regulators do not want you to learn.

Sir, Ferdinando Giuglano writes: “banks with more equity and fewer bad loans on their books are better-equipped to lend to dynamic start-ups, which will drive economic growth in the future” “Italy resists Brussels’ tough love on banks” January 18.

That sounds so right, but unfortunately it is not. “banks with more equity and fewer bad loans” will still prefer to go for what their equity could be leveraged more with because that is how they maximize their expected risk adjusted returns on equity. And that means lending to what is perceived, decreed or concocted as safe and not to usually risky dynamic start-ups.

Giuglano also writes: “Italy’s lenders are saddled with around €350bn in non-performing loans — the product of the economic crisis and a stream of poor lending decisions.”

How sad that there is no research on the origins of those performing loans. It would be extremely useful to see which problem loans result from which cause in order to understand what happened. Without having access to any data I would bet that the loans perceived as safe, and against which banks had to hold little capital, represent the largest percent of poor lending decisions, and the loans that might be consider risky are those suffering the most from the economic crisis… among other because banks, scarce of capital, are forced to get out of these.

There are things about bank regulations that regulators do not want us to learn. And as a consequence, we still suffer from the mistakes.

Sir, I see Giuglano is a commentator for La Repubblica. Would he help me ask his Italian bank regulators the following very simple and basic questions? Depending on their answers Italy might want to sue the Basel Committee for Banking Supervision on the grounds of very negligent regulatory behavior. 


To parade badly failed global bank regulators wearing dunce caps, is one right way to silence dangerous nationalism

Sir, I am all for globalization. My father a polish soldier saved from Buchenwald by the Americans; I was born in Venezuela; with high school and university (economist) in Sweden; an MBA in Venezuela, spent over a year as an intern in a British Merchant Bank in London (and LSE and LBS); also a Polish citizen; a financial and strategic consultant in Venezuela; a representative in Caracas for a Chilean bank; having worked for corporations and investors from and in many places; a former Executive Director of the World Bank who wanted migrants to have a seat at its Board so that the world at large would have more representation; since 15 years living in Washington; and now happily with a grandfather of two Canadians, I am, de facto, probably as globalized as you can be.

But, if what’s put on my plate is dumb and dangerous globalism, then I swear I have no problem whatsoever going very local, in order to defend to my very best, my many diverse national interests, of course, primarily, those of my grandchildren.

So now, when I see Martin Wolf, in “The economic perils of nationalism” January 18, writing that those (Davos/Basel Committee) globalizers who created a “financial crisis” have seen “their reputation for probity and competence… devastated” I cannot but say: “My oh my, what a lie!”

There all still there. Those who retired might have written well-reviewed books, or had positive books written about them, and those who have not retired, have actually been promoted.

I am totally for trade, and so I fully agree with Martin Wolf in that “one might gain more from foreigners than fellow citizens”. But that does not have to mean you give foreign citizens the opportunities you deny your own.

When bank regulators introduced their risk weighted capital requirements for banks, they gave banks more incentives to finance “The Safe”, like sovereigns and AAArisktocracy, no matter where these found themselves on the globe, than to finance “The Risky” of their localities, like SMEs and entrepreneurs. And that was wrong, and that did not serve any purpose. If I am going to have to suffer a bank crisis, I prefer a thousand times that to be the result of banks having financed my locals too much, than for instance, in the case of European banks, these having financed the US residential subprime sector too much.

Sir, what’s our real problem? It is that there is more accountability on the local level than on the globalized one, and that of course, opens up the door for any misguided populism.

To for instance start parading bad global bank regulators down our avenues, wearing dunce caps, instead of giving them a red carpet treatment in Davos, would be a good way to begin silencing dangerous nationalism.

PS. That parade would perhaps also have to include all those who have so much favored regulators by keeping so mum about their failures. Mi capisci?


Would Hollywood allow those responsible for a 2007/08-crisis box-office-flop to walk down a Davos red carpet?

Sir, Chris Giles writes: “Almost all countries are failing to improve growth rates” … Responsive leadership — [is] the theme of this year’s World Economic Forum in Davos” “Economies need to heed wrath of the ‘left behind’” January 17.

And Giles also quotes 1994’s Paul Krugman with…“Productivity growth isn’t everything, but in the long run it is almost everything”

Sir, how can you not leave too many behind, and make it harder for productivity to grow, when regulators give banks incentives to refinance the safer past and present economies, but not to take risks on the “riskier” future.

Their 20% risk weighting for AAA rated and sovereigns like Greece, while handing SMEs a 100% weight handicap, caused the crisis, and has hindered a better recovery.

Neither Hollywood nor Bollywood, would ever have allowed the script writers, producers, actors or directors, responsible for such an box office-flop as the 2007-08 crisis, to walk down the red carpet. Why can those in Davos do so? The answer is that those besserwisser experts are self-appointed, and therefore not subject to be vetted by a box-office… and so now populists looking for votes are vetting them.

PS. I hear there is some confusion going on in the Basel Committee. Some members are nervously starting to ask each other: “Could it really be that what’s perceived safe is riskier for banks than what’s perceived risky?”


January 17, 2017

Do risk weighted capital requirements for banks promote or kill the animal spirits Lawrence Summers think important?

Sir, Lawrence Summers writes: “Animal spirits are as fickle as they are important”, “A bitter comedown from Trump’s sugar high” January 17.

Question: Does Professor Summers believe that the pillar of our bank regulations since 1988, the risk weighted capital requirements for banks, promotes or kills those animal spirits he thinks important?

As for me I have no doubts it kills it! Giving banks extra incentives to go in pursuit of the safe and abandon the risky just means that what’s decreed, concocted or perceived as safe, will get too much bank credit, at too low interests, while that which is perceived as risky, like SMEs and entrepreneurs, will get too little or in too expensive terms.

If there is any animal spirit left in the banks after that, then surely it is not those of lions but those of hyenas.

P.S. Professor Summers, you who know so much, would you on behalf of bank regulators dare advance some answers to the following questions?


Donald Trump, with a huge political bounty on his head, poses little real threat to that dry hide global trade is.

Lately, every day, I have gotten, I don’t know why, at least ten offers to be part of the bringing Donald Trump down effort, asking me of course to help pre-finance it. There’s no doubt there’s a huge bounty offered for Donald Trump’s political head.

Then in Venezuela, when referring to complex issues, we also have a saying that goes: “You step on one corner of the dry hide, and up goes the other!”

Sir, and that is why I refuse to believe Alan Beattie when he writes that “Fate of free trade depends on the whims of one man”, referring to President elect Donald Trump, January 17.

Trade is a dry hide, you save some jobs here, and you lose some there, and you need to convince some consumers to pay for it all. To then go against free trade, after globalization has brought forward so many of its offerings, and when having a huge bounty on your political head, sounds like a true mission impossible. In fact, were Trump to manage to do so; it would be difficult to ascertain whether Trump is too smart or the bounty hunters too bad.

PS. Sir, Beattie refers to a possible role of WTO. That shows he does not know how much WTO has already been left behind by trade realities. (Sorry WTO technocrats, its not my fault)

PS. In the 1870s, they did not have container-ships, or so much interdependence on the production of parts, or so many consumers shopping on the web.

PS. Are there no threats then to global trade? Oh yes, but Donald Trump's trade policies, is not one of these.


A tax on robots or similar substitutes for humans, and a Universal Basic Income, solves many of the challenges of automation.

Sir, Guy Wroble writes: “As automation will target more expensive labour first, aside from a limited number of tech jobs to service the machines, humanity would appear to be on the road to becoming the hewers of wood and the haulers of water. Jobs which pay so little that it makes no sense to automate them. “Automation may lead to humans hewing wood” January 17.

Indeed that could happen, if we do not do anything about it. But we can! Tax all what substitutes for human jobs, and have those tax revenues help fund a Universal Basic Income payable to all.

That way we would not only level the field for humans to compete with robots and similar, but we would also make sure humans do not have to offer themselves to perform the chores that robots are most suited to do.


When will supposedly sophisticated papers like Financial Times wake up to the horrors of current bank regulations?

Sir, Ray Soifer writes: “No wonder banks’ shares generally trade at a discount to their stated book value. No one really knows what their true net asset value is — too often, not even the management.” “Picture of risks in banks’ portfolios is still fuzzy” January 17.

Of course! How could it be otherwise? Banks are currently most certainly paying more for consultants to understand their regulator’s risk/required capital management, than what they pay for the risk management of their own portfolio. Because, how is one to understand risks in banks’ portfolios when the risk weights used by regulators are, to top it up, portfolio invariant, since to do these portfolio variant would be, as they confess, too difficult for them to do?

Could it be because when something is too out of line, it is sort of easier to attribute an intelligent motive to it? Sir, again it all reminds me so much of Chance gardener a.k.a. Chauncy Gardiner


Are we supposed to be very impressed with the intellectual capacity of Davos’ besserwissers?

Sir, in Wikipedia we can read that Martin Wolf “has been a forum fellow at the annual meeting of the World Economic Forum in Davos since 1999.” If that’s true, which it does not necessarily have to mean in these days of fake-news, Mr. Wolf is as much a “Davos” man as anyone else of them.

I make a note of this because now Wolf writes: “weakening of globalisation partly reflects the exhaustion of easy opportunities for global commerce and the feeble growth of demand since the crisis. But it also reflects shifts in policy: the post-crisis re-regulation of finance has had a pronounced home bias, with reduced support for cross-border activities.” “Populism will not lead to a better world” January 17.

What? Do we now have a “pronounced home bias”? What about Basel II’s risk weights of 0% the Sovereign, 20% the AAArisktocracy, and 100% “We the People” and that are mostly still in place?

No, though I might run the risk of being be tilted a vulgar populist by Davos’ Wolf, I assure you Sir that I do not find much wrong in reducing the regulator’s pronounced risk aversion bias; that which have them favoring the lending to “safe” corporates wherever they are, or to friendly and “safe” Sovereigns, over the lending to “risky” SMEs and entrepreneurs in their own localities.

And what’s that running around like chickens, scared of some possible horrors of neo-protectionism, in a world that has been so much changed? Do the Davos intellectuals really think that Trump would be able to impose really major increased costs on the American consumers? Like telling its kids “the price of an I-phone will be 50% higher because it has to be made in America… and you must now wait one year more to have it delivered? Forget it! That would be like introducing a 50% tax on all purchases on the web, so as to defend the local mom and pop stores. The smuggling of drugs and fake goods would then be minor compared to that of the so many new entrants.

What Davos should be doing though, is to analyze the need for new solutions in a world in which, because of increased automation, there will be more and more structural unemployment; and also one in which, for sustainability reasons, perhaps some consumers’ aspirations must be reduced.

I believe a Universal Basic Income might indeed be one of the best tools available. I fret though about leaving the discussions on such beautiful and delicate solutions that can so easily be distorted into a monster, in the hands of the so many redistribution profiteers and besserwissers always present in Davos.

PS. Basel II assigned a risk weight of 20% to those rated AAA-AA; and one of 150% to those rated below BB-. Sir, are we supposed to be impressed by the intellectual capacity of the Davos group that saw nothing wrong in considering those perceived as very risky a much bigger threat to the banking system than those perceived as very safe? You tell me!


January 15, 2017

When will an Artificial Intelligence Agent declare humans too dangerous drivers and too dumb emission measurers?

Sir, I refer your “From diesel emissions to omitting the driver” January 15.

It is clear, not withstanding only one side will pay for it, that in the case of the failed carbon emission controls, both the measured and the measurers are to blame. Any regulation, if it fails in any shape or form, should bring on some consequences for the regulators… let us say a 50% salary reduction.

As is, just look at the case of bank regulators, those who set risk weights of 20% for what is AAA-rated, and 150% for what is below BB- rated. That evidenced they had (have) no clue about what they were doing; and so they caused the AAA rated securities backed with mortgages to the subprime sector crisis. But they are still going to Davos, flying business class the least, to lecture the world on what to do. 

It is also clear that one of the biggest challenges for the safety of driverless cars is that these might also encounter human drivers on the road. So either is the driverless-cars equipped with software that handles human-driving whims, or, sooner or later, some Artificial Intelligence Agent will take us humans off the road. Is that good or bad?

My answer to that question goes somewhat along this line. If absolutely all humanity is taken off the road, and so we all lose entirely the abilities needed to drive, so be it. But, if some humans were still allowed to drive, why would I want those to be somebody else’s grandchildren and not mine? 

PS. About driverless cars, the issue of how to tax these, so as not to lose out on the taxes we currently collect, for instance from PhDs driving taxes in New York, is also pending.


January 13, 2017

Higher import tariffs and minimum wages are superb news… for robot manufacturers

Sir, Richard Waters writes: “Pace of automation will depend on how easily workers are displaced” January 13.

And that partly depends on how much robot, driverless cars and similar automation options, will lobby the governments for higher import tariffs and higher minimum wages.

Or on if we will impose some payroll and minimum wage taxes on these, in order for the humans to compete on a more level playing field.


January 12, 2017

Regulators should not focus on those risks (weather prognosis) bankers already consider, but on the uncertainties

Sir, several prominent names write: “Last week Andy Haldane… admitted that economists had failed to predict the financial crisis, and compared the situation with that of ill-informed weather forecasting in 1987 — the “Michael Fish moment”. And the experts argue: “At the heart of the crisis would appear to sit faulty accounts and unreliable audits” and as a consequence they request more reliable accounting rules. “Clearer picture of banks’ capital is required to help avert crises” January 12.

Sir, no can argue against better accounting rules, but please, that is not what created the financial crisis.

In terms of weather forecasting what happened (and what is still happening) was that not only did the banks follow the credit forecasts to set their exposures and interest rates, but so did the regulators, when they set their risk weighted capital requirements. That meant that “weather forecasts” got to be excessively considered. The regulators role on the contrary was and is, not the management of perceived risks, but to consider the uncertainties, like weather prognosis being utterly wrong.

PS. De facto, absurdly, it meant regulators believed bankers were going to go out, especially, when the weatherman was announcing a storm. 


January 11, 2017

If regulators keep on regulating as bad as now, will it really help much to ringfence the banks?

Sir, you write: “By the start of 2019, Britain’s largest lenders will need to put their retail banking units inside a heavily capitalised subsidiary, protecting them in case the group fails.”, “Ringfencing will help in the next banking crisis”, January 10.

Do you really think that as long as government/tax-payers are not exposed to having to pay for a bank crisis, then its effects are smaller? If so, why did you not say so before lending support to governments and central banks, on behalf of unwilling or at least un-consulted taxpayers, with Tarp and QEs and similar paying out so much to alleviate the last crisis?

You refer to the Vickers Commission with admiration I do not share. In June 2015, in one of my thousands of ignored letters to you, when commenting on one of Martin Wolf articles I wrote: “The number one priority for any bank regulator, long before thinking about ring-fencing and similar “safety” devices, is to make sure the allocation of bank credit to the real economy is not distorted. To look for banks to be able to survive in shining armor in the midst of the rubbles of a destroyed economy is just insane.”

Sir, I’ve seen very little rectification coming out from bank regulators. Worse yet, the few correct movements they have done in moving towards simpler leverage ratios, because they kept in place some risk-weighting element, have in fact, on the margin, only increased the distortions in the allocation of bank credit to the real economy.

FT, in this matter of Basel’s bank regulations, you are so behind the curve. As is, I am almost tempted to say: “No ringfencing, let the banks run loose, with no supervision!”


Risk weighted capital requirements for banks caused the animal spirits of hyenas to substitute for those of lions.

Sir. We had a crisis, which resulted directly from the distorted incentives for the allocation of credit to the real economy that the risk weighted capital requirements for banks caused. If anyone doubts that, just consider that Basel II, of 2004, allowed banks to leverage equity a mindboggling 62.5 to 1 with private sector assets, as long as these assets had an AAA to AA rating. If they did not posses a credit rating then a 12.5 to 1 leverage was the max.

True, FDIC and the Fed did not allow USA’s commercial banks to follow these Basel II rules initially, but the SEC did allow the investment banks to do so, as were European banks allowed to do. That set off the most voracious appetite ever for AAA rated assets, and the markets, understandably, set out to satisfy that demand, in any which way it could, even if by means of fraudulent behavior. Because that is what markets do!

To top it up, with Basel I of 1988, the regulators had risk-weighted Sovereigns with zero percent, and consequentially banks were allowed to build up huge exposures against little capital for sovereigns such like Greece.

And then we had Central Banks, Fed, by means of QEs, injecting the mother of all liquidity in the markets, and again, by foremost buying up sovereign debt, mostly benefitting governments, and indirectly those who already owned assets like stocks.

Sir, the can of the crisis was simply kicked down the road; and the regulations that make banks earn higher risk adjusted returns on equity when financing the “safer” past and present than when financing the “riskier” future kept in place. Our grandchildren will hold us accountable for this.

Martin Wolf nonetheless gives a very positive review of Obama’s eight years of economic policy, “How Obama rebuilt the economy” January 11. How come?

The truth is that Wolf does not get it yet! Here he writes of “a broader post-crisis loss of animal spirits” without being able to understand that those risk weighted capital requirements for banks that I referred to, pre and post crisis, what they have done is to substitute the spirits of hyenas for the spirits of lions.


January 07, 2017

Our “free market capitalism” is just the frosting on a statist cake baked by bank regulators in 1988.

Sir, Yuval Noah Harari writes: “Since 1989 elites in the west have come to believe in the “end of history” narrative, according to which liberal democracy and free market capitalism have won over all rival social systems, and the world is therefore bound to become a global community managed through free markets and democratic politics.” … However, since the global financial crisis of 2008 people all over the world have lost faith in the liberal recipe.” “At last, liberals are waking from a long dream” January 7.

That is indeed the conventional version, but “The truth is, so many don’t understand what’s going on in the world.”

In 1988 and in 2004, with Basel I and Basel II, regulators introduced risk weighted capital requirements for banks which allowed banks to leverage almost limitless when lending to the Sovereign, much, like 60 to 1, when lending to the safe AAArisktocracy, and only about 12 to 1 when lending to the “risky” We the People, like to SMEs and entrepreneurs.

Harari opines “the coming years might well be characterised by intense soul-searching and by attempts to formulate new social and political visions. Indeed, liberalism might yet reinvent itself”

If that is to happen, then the first order of the day for those aspiring to qualify as elite, is to understand how they so completely missed out on how these regulations would distort the allocation of bank credit to the real economy, foremost favoring governments.

Elite, where do you think the western world would be had these regulations been applied to banks during the 600 years before the Basel Accord?

Elite, what do you think Medici and many other bankers would have thought about 0 percent risk weight assigned to the Sovereign?

Elite, do you think the subprime or the Greek mess would have happened if banks were required to hold, for instance, 10 percent in capital against all assets? 

Elite, do you understand how this regulation decrees inequality?

Elite, as is don’t you think crony statism is a more clear definition than crony capitalism?

Elite, why do you think I cannot get an answer from regulators on some very basic questions?

Elite, why do you think the Financial Times will not publish this letter?


January 06, 2017

C-suite experience can be just as irrelevant to real Main Street animal spirit as government bureaucracy experience.

Sir, Gillian Tett discusses the respective government and C-suite experience statistics of different government teams, and comments that those “83 years of C-suite experience” of Trump’s team and some of the policies announced, like tax cuts, “could ignite animal spirits”, “Team Trump unleashes animal spirits” January 6.

Sorry, the “animal spirit” of an extraordinarily well paid C-suite manager, the owner of a multi million dollar golden parachute, and who is invited to a great restaurant by a banker willing to discuss a billion dollar loan, might be for the purpose of repurchasing the shares of the C-suiter’s big corporation, can have as little of any real Main Street animal spirit, than any government bureaucracy lifer.

"Risky" SMEs and small time entrepreneurs, those who have their bank credit applications most often rejected, now most specially because of the risk weighted capital requirements for banks, those are the ones who really need to be present on Trump’s team, if he is ever going to have a chance to deliver on his popular populist promises.

In fact, C-suite managers could be too dangerous, since these are quite likely those who would be engaging the most in crony statism… in other words ”The Real Swamp”

PS. Came to thing about it. C-suite manager's animal spirits are more like animals in the zoo's spirits.


January 05, 2017

Risk weighted capital requirements for banks, is a false solution that is destroying the western world

Sir, Martin Wolf writes: “By succumbing to the lure of false solutions, born of disillusion and rage, the west might even destroy the intellectual and institutional pillars on which the postwar global economic and political order has rested.”, “The march to world disorder” January 6.

Again Wolf prefers to ignore the perhaps most destructive false solution that has affected us.

Before 1988, bank credit, except for when criminal activity was involved, was allocated to what produced banks the highest expected risk adjusted return on equity.

But then, in order to make our banks safer, the regulators, with Basel I 1988 and Basel II 2004, imposed portfolio invariant risk weighted capital requirements for banks. Bank credit was thereafter allocated to what produced banks the highest expected risk and capital-requirement adjusted return on equity.

For a starter with risk weights of 0% for the Sovereign, and 100% for We the People, it introduced runaway regulatory statism, just while communism was disintegrating,

It also caused a dangerous risk aversion, which has bankers no longer financing the riskier future but only refinancing the safer past and present, something which of course is a driver of inequality.

How could it have happened? Six major factors stand out.

First, although hard to believe, bank regulators never defined what the purpose of banks is before regulating these. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

Second, equally hard to believe, the regulators never researched what had caused bank crisis in the past; namely unexpected events, criminal doings and what were ex ante perceived as very safe but that ex post turned out very risky. What is perceived as very risky is, precisely because of that perception, what is least dangerous to the system. “May God defend me from my friends, I can defend myself from my enemies” Voltaire

Third, regulators completely missed out on that any risk, even if perfectly perceived, causes the wrong actions, if excessively considered, and doubled down on the ex ante perceived risks.

Fifth, not understanding that, as regulators, they could be introducing serious systemic risks.

Sixth, a general Groupthink, that which results from allowing experts to isolate themselves in a mutual admiration club.

The saddest part of the history though is how after so much evident failure, and evident waste of stimulus like QEs, the risk weighted capital requirements for banks is still discussed as part of a solution. To that we have many silencers, like you Sir and like Martin Wolf to thank for.

Sir, where would the western world have been if since Medici banks had used risk weighted capital requirements for banks


The real winners of President Trump’s animosity towards cars built in Mexico could be robot manufacturers.

Sir, Peter Campbell and Jude Webber refer to “Mr Trump’s ire on Tuesday, when he tweeted that GM should face a “big border tax” for importing cars from Mexico.” “Trump to give Mexican cartrade a bumpy ride”, January 5.

I have no idea of President Trump’s financial holdings, but should he own shares in robot manufacturers he should be careful about a conflict of interest, as leashing out against Mexican car jobs is a great and direct way to increase the demand for robots in the USA.

PS. Anyone who argues in favor of minimum wages should, for the same reason, also be required to disclose any personal interest in the robot industry.

PS. Off the cuff formula: Jobs lost in Mexico minus jobs gained in USA equals new sale of robots.

January 04, 2017

Draghi, the more confidence we have in risk weighted capital requirements for banks, the dumber and more fooled we are

Sir, Caroline Binham and Emma Dunkley quote Michael Lever, head of prudential regulation at AFME, which represents the biggest banks and other markets participants, with: “It is important to take the time to create a framework that is capable of accurately measuring the risks that banks are assuming” “Banks win Basel reforms reprieve” January 4.

Hold it there! The problem is not only in measuring risks. The problem is also in assigning the relative importance to the risks measured.

The current capital requirements for banks are based on ex ante perceived risks that should be cleared for by bankers, by means of interest rates and size of exposures. The result is that ex ante perceived risks are excessively considered. Therefore that causes a wrong allocation of bank credit; and this even if the perceived risks are perfectly accurately measured.

This regulation now causes that what is perceived as “safe”, like AAA rated or Sovereigns, get too much credit at too low rates, which is dangerous for the banks; and that what is perceived as “risky”, like SMEs and entrepreneurs, receive too little or too expensive credit, which is very dangerous for the real economy

Mario Draghi, president of the European Central Bank, who chairs the Basel committee supervisory board, is here quoted with: “Completing Basel III is an important step towards restoring confidence in banks’ risk-weighted capital ratios, and we remain committed to that goal.”

To that my only one answer, for the umpteenth time, is “No!” The more confidence in something that is so rotten to its core the worse.


January 03, 2017

According to FT’s research, how much do minimum wages and absence of payroll taxes favour robots?

Sir, Vanessa Houlder writes: “When you book an Airbnb room in London, around a third of the $100 saving you make over the price of an average hotel room is due to tax advantages which favour Airbnb’s business model, according to research by the Financial Times” “Airbnb makes most of legal wiggle room to beat hotels” January 3.

Houlder goes on with: “Research from Morgan reported a higher than expected “cannibalisation of traditional hotels” over the past year, citing survey findings that 49 per cent of Airbnb users in the US, UK, France, and Germany had replaced a hotel stay with a stay booked through the online group.”

Indeed, since it is a human owner of an apartment eating up the opportunity from a human owner of a hotel room, it could be described as “cannibalization”. But, how should we describe when for instance a robot or a driverless car takes away a job opportunity from humans? If, for instance, that happens only because of minimum wages and absence of payroll taxes, is that more like human-offerings at the altar of automation and technology?


Our younger generations have much more valid reasons than savers and bankers to profoundly resent bank regulators

Sir, Patrick Jenkins reports that the world’s savers and bankers have every reason to resent the posse of policymakers, one of the most powerful quangos in the world, the Group of Central Bank Governors and Heads of Supervision — GHOS for short, and that will meet on January 8”, “Time for GHOS train to leave the shadows and reconnect” January 3.

At the meeting the group will discuss “the future direction of global financial regulation” the “system of risk-weighting the assets on banks’ books” and “the riskiness of banks’ mortgages and SME lending”

Well no. Those who most should resent GHOS (and the Basel Committee for Banking Supervision) are the young.

These irresponsible bank experts, without considering the purpose of banks, and without any empirical studies on what causes bank crises, decided that it was much better and safer for banks to finance “safe” houses than to finance “riskier” SMEs.

That translated into bank financing more the basements where unemployed young can live with their parents, than financing the job creation that can allow the young to be able to afford becoming parents too.

To top it up, they also decided that it was much safer to lend to the governments than to the private sector.

I have for more than a decade and in more than 2.500 letters tried to convince FT to help me to ask these “bizarrely secretive” regulators some very basic questions. Unfortunately until now I have had no such luck.


January 01, 2017

The Basel Committee’s risk weighted capital requirements for banks, put the 2007/2008 “Minsky Moment” on steroids.

Sir, John Authers writes: “The greatest dangers to us are not from things we perceive to be high-risk, because we generally treat them carefully. Trouble arises from that which we perceive to be low-risk.”, “Unnatural calm sparks visions of a ‘Minsky Moment’” December 31.

Sir, you know I have written more than a thousand letters to FT over the last decade pointing out exactly that. For instance in July 2012 Martin Wolf wrote: “Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

Unfortunately FT has refused to accept the complete implications of this truth.

Authers, as if it suffices as an explanation now writes: “The crisis that came to a head in 2008 revolved around securities that the rating agencies had given the maximum rating of triple A — it would not have happened if they had been considered speculative”.

No! The full truth is that not only did markets and bankers consider and acted as if those AAA rated securities were safe. Regulators did too. With Basel II of 2004 they assigned what was AAA to AA rated, a risk weight of only 20 percent. Thereby they allowed banks to leverage 62.5 times to 1 their equity with these securities. Had banks been allowed to only leverage 12.5 times to 1, as they were limited to with loans to “risky” SMEs and entrepreneurs, that crisis might not even have been identified as a “Minsky Moment”.

Sir below is a link to the full explanation to what really happened with the AAA rated securities backed with mortgages to the USA subprime sector. Do you have it in you to share it with your readers?


It is only the bankers’ responsibility to clear for risks. The regulators should only prepare banks for uncertainty.

Gillian Tett writes that Axel Weber, the chairman of UBS, “suggests investors urgently need to think about the difference between ‘risk’ and ‘uncertainty’: the former refers to events that can be predicted with a certain probability; the latter refers to unknown future shocks.” “Emerging markets offer clues for investors in 2017: Extraordinary political events have upended western assumptions about risk and uncertainty” January 1.

Let us see if this distinction helps Ms Tett to see that with risk weighted capital requirements for banks, both bankers and regulators are clearing for risk. The result is that “risk” is excessively considered while “uncertainty” plays a secondary role. Seemingly it is too hard for regulators and anthropologists to understand the simple truth that any risk, even if perfectly perceived, causes the wrong actions if excessively considered.

To subject banks to this double counting of risk means banks will lend too much to what is ex ante perceived, decreed or concocted as “safe” like AAA rated securities and sovereigns like Greece, and too little to what is perceived “risky” like SMEs and entrepreneurs.

Only the exclusive use of a leverage ratio, which represents a capital requirement that has nothing to do with perceived risk, is what could help banks prepare for uncertainty, without distorting the allocation of bank credit to the real economy.