May 31, 2017

Martin Wolf, the western alliance is facing much more serious threats than Trump.

Sir, if an American citizen would I have voted for Donald Trump? NO! though not for Hillary Clinton either. That said each day I now wake up to see, which are the impeachable offenses or similar disasters Trump is being accused of during last 24 hours, or 24 minutes. Today it is Martin Wolf arguing he might be “disintegrating…The western alliance…the world’s biggest economic bloc and largest repository of scientific and business knowledge.”, “The rise and fall of American leadership”, May 31. Boy, as far as Trump misbehaving goes, that clearly beats any firing of the F.B.I. Director!

But NO! I can think of much larger threats.

Like having bank regulators willing to pay the price of distorting the allocation of bank credit, only to aspire having the banks standing there safe in shiny armors, at the burial of the real economy.

Like our societies not preparing in the least for how to manage all growing structural unemployment so that it does not detonate in social mayhem.

Like our societies allowing the profiteering that increases the costs of what needs to be done in order to contain the damages done to our pied-a-terre. If as Wolf opines “The Paris climate change agreement of December 2015 was not an answer to the challenge”, then perhaps good riddance.

Wolf holds Trump does not “seem committed to the mutual defence principles of Nato” which if true, I agree is very bad… though some thoughts on what “mutual” should mean in this context, would not be out of line.

Finally if Merkel because of Trump finds reason to state that the European Union would have to “take our destiny into our own hands”, then clearly he has done Europeans a great favor, reminding them that that is how it always should be.

Sir, this sure reads like that Wolf, as so many, is suffering from a severe bout of trumpitis. I sure hope he gets better because, if Trump really turns into a clear an immediate danger to our western world, then we all need to be much more clearheaded.


May 29, 2017

When will the nonsensical talk about failures of the neoliberal system in the midst of runaway statism end?

Sir, Rana Foroohar writes: “Many progressive economists believe that the failures of the neoliberal system itself (which have been chronicled by even the IMF) have created a broad-based existential angst reflected in the new propensity of Americans to save rather than spend.” “The trust deficit is permanent” May 29.

Nonsense! Since 1988, Basel I, we have had regulations that for the purpose of setting the capital requirements for banks, have risk weighted the sovereign with 0%, and the ordinary unrated citizen, like any SME or entrepreneur, with 100%. That means banks can leverage their equity, and the explicit or implicit support they receive from taxpayers, many times more when lending to sovereigns than when lending to citizens. That means banks will obtain much higher expected risk adjusted returns on equity when lending to the sovereigns than when lending to the citizens. That causes banks to lend too much at too low rates to sovereigns, and too little or at too high rates to citizens.

What on earth has that to do with neoliberalism? Nothing! It is just the opposite. It is raving statism!

What we really have though are truly second or third class (or overly statist) progressive economists. They are unable to understand these bank regulations, by favoring so much the sovereign, the AAA-risktocracy and house ownership, over allowing the citizens to access that bank credit that could help them move up in life, is putting inequality on steroids.

There is no problem at all with high savings, if these can be efficiently channeled to the real economy, for instance by banks. But, if that is not the case, then these savings will not serve any good purpose… these savings will not even recover their original value when the real economy stalls and falls.


Universal Basic Income panics redistribution profiteers. OECD’s model insists on these targeting better the poor.

Sir, Chris Giles writes: “The modeling exercise by the OECD, the Paris-based organization of mainly rich nations that specializes in cross-national comparisons of policy ideas… shows the simplicity of basic income schemes would come at the cost of a need for increases in taxation, less effective targeting of support on the poorest and large numbers of gainers and losers.” “Basic income ‘would fail to reduce poverty’” May 29.

What can I say? The study is full of self-serving premises like “the right to a basic income would undermine the incentives to work because it would ‘sever links between carefully balanced rights and responsibilities of job seekers’”. There it completely ignores the role of UBI in helping the unemployed, without creating any stigma, to get out of bed in order to capture whatever temp opportunities there might exist in a job market characterized by more and more structural unemployment.

Also when the report concludes, “Large tax-revenue changes are needed to finance a basic income at meaningful levels,” any savings of redistribution costs are clearly ignored, and the “meaningful level for a basic income” is undefined.

Sir, this is clearly a case of redistribution profiteers defending the value of their franchise. That is only to be expected.


Trump might have done Europeans a huge favor by reminding them they have to fight for their own future themselves

Sir, today, May 29, is Memorial Day in the US. That is the day I walk down to the World War II Memorial in Washington, to try to thank those Americans who rescued my polish father from the concentration camp of Buchenwald more than 70 years ago. Had they not done that, I would not be, it is as simple as that.

But today I read Patrick McGee’s and George Parker’s “Europe can no longer rely on US partnership, warns Merkel” all the result of “a new transatlantic rift that has emerged after two days of international summits with President Donald Trump last week.” 

Is that true? No! Even when the partnership in World War II depended on very few, in my mind on Roosevelt and Churchill, any long-term partnership of this nature cannot really depend on what temporary leaders opine. If it did, it never existed.

There are of course general concerns. Like should I ask the Americans in the Mall to forgive Europeans for not showing the same interest in carrying their fair share of the defense load? Like, in these times of outsourcing, are the European and American manufacturing sectors able to respond somewhat similar than America did when it built up what Roosevelt called the Arsenal of Democracy, and that without it would have given the war a totally different outcome? Like, in these times of drones doing more and more of the fighting, are our soldiers capable to keep sufficiently of that fighting spirit that at the end of the day will be needed? And there is more… like the huge public debt loads and other minutia.

Sir, and if Chancellor Angela Merkel is sort of indirectly excluding the UK from the European defense, does that mean perhaps Britain should begin thinking about the need of promoting some English Language Empire as a substitute?

I do agree though 100% with Ms Merkel when she says: “We have to fight for our own future ourselves.” That is always the case, no matter what partnership or alliance you find yourself in. Merkel should reflect on the irony that Trump might have done her and all Europeans a great favor of reminding them of that simple fact of life.


May 27, 2017

Why should technocrats seemingly be exempt from U-turn requirements, even in the face of horrendous mistakes?

Sir, Tim Harford writes: “For many government policies, it’s important to have an emergency stop to prevent bad ideas getting worse”, “In praise of changing one’s mind” May 27.

The worst idea, of the last century at least, has been that of, in order to make the banks safe, one needs to distort the allocation of bank credit by favoring, as if that was needed, banks’ exposures to what is perceived safe over those to what is perceived risky.

That meant that when the ex ante perceptions of risk, of especially large exposures, ex post turned out to be very wrong, that banks would stand there with especially little capital.

That meant that those rightly perceived as risky, like SMEs and entrepreneurs, those so vital for conserving the dynamism of the economy, would find their access to bank credit much harder than usual.

The 2007/08 crisis caused by excessive exposures to what was perceived or decreed as safe, 2007/08, AAA-rated, Greece, and the economies lack of response to outrageous stimulus thereafter clearly evidences the above.

But nevertheless, the concept of risk weighted capital requirements for banks, although somewhat diluted, still survives distorting on the margin as much, and in some cases even more than before.

When one reads Basel II’s risk weight of 20% for what is AAA rated and 150% for what is below BB- rated, the only conclusion one who has walked on Main Street could come to, is that a 180 degree turn into the directions of the risk-weighting would seem to make more sense.

Sir, why is it so easy for journalists to mock changes of minds of public political figures like Trump and May, and not the lack of change of mind of for instance the technocrats of the Basel Committee, the Financial Stability Board, BoE, ECB, IMF, Fed and so on?

Could it be because the latter “experts” tend to find themselves more in the journalists’ networks? Or could it be because of NUIMBY, no U-turn, no changing my mind, never ever in my own back yard. 

Sovereigns were handed a 0% risk weight! Why do we have to keep on reading references to deregulation or light-touch regulations, in the face of one of the heaviest handed statist regulations ever? Could it be because most journalists are also runaway statists at heart?

Why do "daring" journalists not dare to even pose the questions that must be asked?


May 26, 2017

Require banks to hold capital against the unexpected, making sure those not able to manage perceived risks fail, fast

Sir, Nobuchika Mori, commissioner of Japan’s Financial Services Agency writes: “Regulators have made the global financial system more resilient by major regulatory reforms. Banks now have much bigger capital and liquidity buffers. Resolution frameworks have been strengthened. Derivatives markets are being made safer, while toxic forms of shadow banking have been detoxified.” “A holistic approach to future-proofing the financial system” May 26.

Holy moly! How come bank regulators have not been nominated for a Nobel Prize? I mean, if Bob Dylan and Juan Manuel Santos could each get one, and if what the author says is true, these also sound to be worthy one or two.

But no! Nobuchika Mori then goes on describing some pending issues that would not make them worthy of a prize, on the contrary, more worthy of being sacked.

He writes: “It is possible that funds are not being allocated in ways that foster economic growth. Credit should be provided in ways that enhance productivity, revitalise industry, foster innovations and create new businesses.”

Indeed! But should not the purpose of the banks have been defined before regulating these?

He writes: “We need supervision to establish whether regulation offers perverse incentives to banks to accumulate excessive risks.”

More than supervision what is needed are regulators that understand that with their current capital requirements, banks will accumulate too large exposures against what is ex ante perceived as safe (but that ex post could be risky) and too little exposures to what is perceived as risky, like those “small and medium-size enterprises” those who according to the author could “help to revitalise local communities”

“The model [is] portfolio invariant and so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.”

The explicit reason for that mindboggling simplification was: 

“This characteristic has been deemed vital in order to make the new IRB framework applicable to a wider range of countries and institutions. Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

But here Nobuchika Mori wants the supervisors to take on even a more active and complex role. That would not be helpful. That implies assigning the supervisors too much capability and, explicitly, too much power.

Much better it is to get rid of all risk weighting setting a reasonable leverage ratio, like 10% capital for all assets (sovereigns included), to cover in part for what is unexpected… all in the knowledge that the faster banks that cannot manage perceived risks fail, the better for all.


It is truly incredible how many dare to ascertain things they can have no real idea of. Fake-opinions?

Sir, Chris Giles refers to that Theresa May ended a conversation with a brusque: “You can have all the evidence in the world, but headteachers have told me grammar schools are good for disadvantaged pupils.” But he similarly says: “Regulators have made the global financial system more resilient by major regulatory reforms. Banks now have much bigger capital and liquidity buffers.” “Evidence beats anecdote in politics as well as economics” May 26.

That is also pure anecdote. Giles can really have no real evidence for what he is opining. During the last years banks might very well have accumulated excessive exposures to what ex ante is perceived as very safe, but that equally could ex post turn out to be very risky. Building up that kind of dangerous exposures, against the least required capital, is precisely what regulators’ risk weighted capital requirements for banks do.

“Labour governments favoured ‘light touch’ regulation of the financial sector” “Light-touch? Nonsense! Fake-fact! Sir, I ask, would you call distorting the vital allocation of bank credit to the real economy to be “light touch” regulation?


Are taxes on petrol correctly used? Repatriation of what “cash”? End users/payers of infrastructure should be present

Sir, Gillian Tett, discussing the financing of president Trump’s plan for infrastructure writes: “One sensible, overdue step would be to raise the petrol tax to pay for infrastructure; another would be to use proceeds from repatriated overseas corporate cash.” “Private money might yet save Trump’s infrastructure plans” May 26.

First, more taxes on petrol just means that more money goes into the same fiscal pocket to be channeled in often quite non-transparent ways to uses that might or might not include the building of infrastructure. The best use of taxes, such as those on petrol, which by the way constitutes de facto a discriminatory import tax on gas, is to transparently help fund a Universal Basic Income scheme.

Second, “cash”, what cash? Could Ms. Tett believe that high denomination bills stored under corporate treasurers’ mattresses represent that cash? Before opining anything about what “cash” could do, I suggest she finds out how that “cash” is currently deployed. Who knows, it might all be invested in gilts.

Finally, I have witnessed decent privatizations and infrastructure PPPs in my life, but I have also seen those that are only ugly expressions of crony statism. In this respect at the negotiation and executions phases of any privatization, any public infrastructure project, or any PPP, future users, or otherwise payers for the projects or the services, should be present… and their names publicly recorded as having represented the citizens.

Too often most of us see something very wrong that makes us reflect: “This would not have been the case had my grandfather or grandmother overlooked what was going on.”


May 24, 2017

With current bank regulations a pervasive drop in economic dynamism should come as no surprise

Sir, Sam Fleming writes: “The US has seen a pervasive drop in economic dynamism in every one of its states since the early 1990s as new business formation sinks and workers move jobs less frequently, according to research that underscores the challenges in restoring entrepreneurial verve.” “Fall in US dynamism underlines Trump challenges” May 24.

How could that not be? Since 1988, our banks are in hand of regulators who decided that, in order to make banks safer, it would be better for these to finance home ownership, which can somewhat reduce mobility, and to avoid financing the risky, such as SMEs and entrepreneurs, those number one economic dynamism providers.

It amazes me how so few understand the distortion in the allocation of bank credit to the real economy that the risk weighted capital requirements cause. The day the world wakes up to that fact, the regulators will have a lot of explaining to do… perhaps even in front of International Courts of Justice.


Nations need unions that represent the unemployed and to get a small universal basic income going, before it's too late

Sir, Anne-Sylvaine Chassany, interviewing Laurent Berger writes: “The leader of France’s largest trade union has warned Emmanuel Macron not to rush labour market reforms as the country’s new president kick-starts negotiations over a bill seen as crucial to revamping the eurozone’s second-biggest economy.The warning is a reminder of the labour relations minefield awaiting the pro-business president” “Macron warned by union leader not to rush reform” May 24.

That evidences how much France and all other nations also need unions that represent the unemployed, in order to create some equilibrium among the forces that influence labor politics.

And of course, setting up a universal basic income system, starting it with a small amount, in France perhaps €150 per month, would also begin to open up the roads to that new society in which robots and automation seem to create structural unemployment.

As I have opined since some years we do need decent and worthy unemployments... before its too late.


May 23, 2017

Current bank swimwear does not stop some to be caught swimming naked when the tide goes out, just the contrary.

Sir, Mohamed El-Erian ends his discussion of “the challenge facing those looking to generate high risk-adjusted returns.”, citing Warren Buffett’s observation that “only when the tide goes out do you discover who’s been swimming naked”. “How the great bull run can have a constructive end” May 23.

We already know a couple of those who will be caught swimming naked.

Sovereigns building up debt assisted by QEs, low interest rates and regulations that forces public debt down the throat of banks and insurance companies.

Corporations, because of low interests rates taking on high levels debt in order pay dividends and buy back shares.

Millennials and those following them believing there is something real out there that will take care of their older days.

Students who took on debt based on illusions about finding a good full-time job, those that are disappearing by the second.

How has all this happened? Regulators said “We have risk-weighted the oceans so there are no more tides.”… and the whole world believed their mumbo-jumbo.

But on the contrary, the risk weighted capital requirements for banks which distorted the allocation of bank credit to the real economy, helps only to guarantee that the tides will be stronger and more destructive than ever.

I swear, bad-luck weighted capital requirements for banks would take care much better of the real dangers, namely the unexpected.

PS. Here are some interesting questions to ask regulators, but only for those who would dare to hear the answers.


May 22, 2017

Just as there is room for higher taxes, there is also room for much lower margins for the redistribution profiteers

Sir, Rana Foroohar writes: “It is likely that companies would put any extra money from a lower rate on repatriation of foreign cash into share buybacks. The 2003 dividend tax did not increase investment, but the 2004 repatriation holiday bolstered buybacks 21.5 per cent.” “The case for higher taxes” May 22, 2017

What? Does she mean that the “foreign cash” is in cash (stashed away under a mattress) and not already deployed in assets like for instance US Treasury Bills?

What? Does she mean that was has bolstered the immense buyback we have seen over the last decade has more to do with repatriation than with the low interest rates imposed on markets by the Fed, by means of QEs and bank regulations?

Clearly there is room for higher taxes, but never ever crazy 83% ones, and not those that enrich the redistribution profiteers, but those that would allow to initiate the payment of a Universal Basic Income, perhaps starting at only $300 per month, and then taking it from there.

That could help growth and that could help reduce inequality.


May 20, 2017

Dear Undercover Economist, in the case of banks, much more than deregulation it was/is ​very ​bad miss-regulation

Sir, Tim Harford writes: “As the world economy grows, one might expect markets to become more like the perfectly competitive textbook model, not less. Deregulation should allow more competition; globalisation should expose established players to pressure from overseas; transparent prices should make it harder for fat cats to maintain their position.” “This is the age of the Microsoft economy” May 19.

“Deregulation”? No way Jose! In the case of bank regulation it is missregulation. The globalised risk weighted capital requirements for banks favor directly the access to bank credit of the “fat cats” and so makes any on the ground competition harder.

Sir, it amazes me why this is so hard to understand, even for an undercover economist.

If you have $100.000 to invest, whether you or a financial advisor takes the decisions, you will most probably end up with a portfolio with some larger exposures to assets perceived in the market as safer, earning lower rates, and some smaller exposures to other assets that because these are perceived as risky, will earn you higher rates. And your portfolio will hopefully provide you with a risk-adjusted return that is acceptable to you.

But not once will you consider the $ invested into safe assets to be any different from the $ invested into risky assets… if you lose anyone of these it will hurt all the same.

Bank regulators decided that for banks, that was not to be. They split the banks’ capital into different $, allowing for different leverages, based on the perceived risk of those assets as such, meaning not on their risk for the bank system.

To top it up they came up with such a loony thing as to assign a 20% risk-weight to the so dangerous AAA rated and one of 150% to the so innocuous below BB- rated.

Of course that has distorted the allocation of bank credit in favor of what is perceived, safer, usually the past and present.

Of course that has hindered competition by making it harder for the riskier, usually the future, like SMEs to access bank credit (and who therefore often having to sell out their dreams to any huge safe incumbent).

Sir, Harford finalizes with: “In the very long run a superstar economy could become a technological utopia, where nobody needs to work for a living. That would require quite a realignment in our economic system”. Indeed that is why I have been arguing for quite some while that we need decent and worthy unemployments… something for which most likely a Universal Basic Income is required.


May 19, 2017

Martin Wolf, to keep the welfare state alive, before considering taxes, look at what real economy you need for that.

Sir, Martin Wolf asks: “Will the UK public sector be able to provide the benefits the public expects in return for the taxes it is willing to pay? The answer to that question seems to be “no”. If so, will the promise to provide some universal services be abandoned? Will taxes be raised? Or will debt be allowed to grow until it has to stop?” Wolf answers: “With current commitments, [fiscal] revenue must rise relative to GDP… The alternative is to abandon pillars of the welfare state.” “It is time to talk about raising taxes” May 19.

That starts from the wrong end. The real question should be what future economy do we need so that it will allow fiscal revenues or other means by which not having to abandon the pillars of the welfare state? The answer to that question might be increasing taxes as Wolf recommends but it could also require many other means, not necessarily including extreme ones like to “choose a collapse in life expectancy”

For many decades I have argued the best and most sustainable pension/health plan to be that of having loving children working in a healthy and functioning economy.

I have been blessed with loving children, thank God, but I do fret about the future economy, as there is no way on earth for it to be either healthy or functionable with regulators distorting the allocation of bank credit, with their insane risk weighted capital requirements.

Since 1988, with Basel I, that set the risk weight of the sovereign at 0% and the citizens at 100%, public indebtedness has been artificially subsidized.

Unless that distortion is eliminated it will guarantee to deliver unsustainable public debt levels and an unhealthy economy. That is because whether the statists like it or not, reality is that government bureaucrats do not know how to use bank credit more productively than the private sector’s SMEs and entrepreneurs.

Having allowed the banks to run up such huge exposures to what is perceived as safe, the past and the present, while refraining from financing the riskier future, will cost our aging society much, because frankly, why should our children and grandchildren ignore that regulatory discrimination against them.

If we do not rectify, there will come a day where the young will show the elderly the finger… pointing at the closest “ättestupa


May 14, 2017

Eliminating bank failures by means of risk-weighted capital requirements, just sounded too good to be questioned.

Tim Harford discussing statistics writes: “We often pay attention to the wrong thing, scrutinising the numbers with a forensic eye without asking about what those numbers really describe. Sometimes there is no intent to deceive; there doesn’t need to be… We deceive ourselves… If we don’t understand the definition there is little point in looking at the numbers. We have fooled ourselves before we have begun.” “Where the truth lies with statistics” May 13.

Indeed and one of the reasons we fool ourselves is that what those statistics are supposed to offer us, sound so attractive that we ignore to look to closely at them.

Basel I and II offered: “In order to make your banks safe we are going to require these to hold capital based on the risks they take”. Who would say no to such an offer? It sounded so attractive that all were willing to overlook that the formulas and calculations provided had nothing to do with the failure of banks, but all to do with the failure of the clients of the banks, which of course is pas la meme chose.

The Basel II offer also included: “And if you order now, we also throw in, for free, those few experts that can expertly decide for all of us what’s risky or not, namely the credit rating agencies”

Basel III now offers: “And if you order now, we also throw in, for free, some liquidity weighted assets requirements holdings that will guarantee banks have the money available to repay when asked”

In short, because regulators offered the moon, the world was gladly disposed to accept anything, even if it would be something like going back to a geocentrically view of the world.

As long as bank regulators, even in the face of failures, are capable with such straight faces insist in that they can make our banks safe, it seems we can’t refrain from believing them. Sir, we are indeed a sorry bunch.

PS. Here are some questions that seemingly are not to be made less we must abandon our hopes that regulators know what they are doing.


May 11, 2017

President Emmanuel Macron, listen to me, this is what you should understand before you act.

Sir, Martin Wolf reduces France’s problems to “low employment; the low rate of economic growth; and the sheer scale of public spending” “The big challenges facing France” May 10.

For a starter Wolf recommends Macron to get down on his knees: “The first priority is to pray for a strong recovery” this since “The persistently high unemployment must be at least partly cyclical”

Nothing wrong with praying, but I would suggest Macron first tries to understand more the origin of these problems.

Low employment? It can surely have something to do with an incipient wave of structural unemployment caused by robots and automation, in which case Macron better starts looking for tools to create decent and worthy unemployments, immediately, before things get out of hand.

Wolf writes: “Mr Macron needs to legislate his labour market”, and for that “The most important priority with the former is to reduce protection for permanent workers: few will hire if they cannot hope to fire.” Absolutely, and so perhaps what is needed are some unions that represent the unemployed and those that work less than 50% in the gig economy… and to get a national debate on universal basic income going, taking care of course of not letting that debate fall in hands of threaten redistribution profiteers. 

Low rate of economic growth? With risk weighted capital requirements for banks that favor the refinancing of the safer past and present over the financing of the riskier future, what else can be expected? I would suggest Macron calls in his bank regulators and asks for instance the questions linked here, and, if he cannot get satisfactory answers then he might copycat Trump: “Your fired!”

The sheer scale of public spending? Back to the regulators again: If you risk weigh the Sovereign at 0%, and the SMEs and entrepreneurs at 100%, you are heading to fall off the cliff of excessive public debt… no way to stop that. What would be the interest rates on French sovereign debt if banks had to hold the same capital (equity) against these loans than what they are required to hold against loans o French SMEs or entrepreneurs?

PS. Wolf writes: “Fortune favours the bold. Emmanuel Macron took a huge gamble and won”. Just out of curiosity, what would have been his huge loss had he not won? As I see it his huge loss would result from not doing what France needs.


“Whut you goin' to do when a [lefty] gits starts to talk purty? I'm jist a [socialist] who cain't say no”

Sir, Janan Ganesh writes: “At some indistinct point in the recent past, the left lost its monopoly on rebellion. To rebel was to be conservative or libertarian. It was more transgressive to buck the sensitivities of the age on race, gender, sexual preference, climate change, civil liberties, mental health and religion than to walk on eggshells around them. This shift in what it meant to be a radical was the price of the left’s success in the culture wars. The more it policed language, the more it inadvertently glamorised anyone who gave voice to unreconstructed sentiments — even if… they almost never mean them.” “Counter-elite mentality” May 6.

The left also lost out when it was not able to resist the siren songs of false sirens like Venezuela’s Hugo Chavez and Nicolas Maduro. I am always reminded of Oklahoma’s Ado Annie singing “I Cain't Say No!

“Whut you goin' to do when a [lefty] gits flirty
And starts to talk purty? whut you goin' to do?
Whut you goin' to do when he talks that way
Spit in his eye?
I'm jist a [socialist] who cain't say no”

Also, even though they understand that terms like “deplorable” do not serve any useful recruiting purpose, they just can’t resist going on and on, like with for instance their current “We and time will make you understand how truly dumb you were/are voting for Trump”, arguing every little minuscule happening into a Trump fault, losing perspective on things.

Frankly, a President who can drop an A-bomb basically at his will cannot fire an FBI director for whatever cause at his will?


May 09, 2017

Those in 1989 so illusioned with the fall of the Berlin wall, never saw the Basel Accord that had hit the West 1988

Sir, Edward Luce writes: “We returned to England in 1989, hungover, each carrying a small chunk of the Berlin wall…We were infected with optimism.” When west isn’t the best Life & Arts, May 6.

And now, soon thirty years later Luce is so disappointed with what has happened thereafter, that he even writes such nonsense as “Others… in Caracas… share Russia’s hostility to western notions of progress”. Mr. Luce, dare go to the street of Venezuela and see for yourself how more than 80 percent of that country is risking their lives on the streets, fighting to maintain liberal values you hold, all in order to demolish a Havana-Beijing-Moscow-Teheran wall built by thugs, and which has destroyed a beautiful nation.

Luce ends with: “The west’s crisis was not invented in 2016. Nor will it vanish in 2017. It is structural and likely to persist. Those who gloss over this are doing liberal democracy no favours”; and that’s having already stated: “The self-belief of western elites saps their ability to grasp the scale of the threat.”

Sir, let us put the house in order. Luce writes: “The year 1215, the year of the Magna Carta, is today seen as the “year zero” of liberal democracy… By limiting the power of the king, the Magna Carta set a precedent for what would later be known as “no taxation without representation.”

Limiting the power of the king? In 1988, one year before Luce chipped away at the Berlin wall, the Basel Committee for Banking Supervision managed to get the Basel Accord agreed… and that accord, for the purpose of the capital requirements for banks, risk weighted the king, the sovereign, with 0% and its subjects, the citizens with 100%. From that moment on the statists’ wet dreams were realized and, amazingly, the western elite said nothing about this rape of the Magna Carta.

But Basel’s bank regulations did not only favor the king, it also introduced a risk aversion that had nothing with that “God make us daring!” attitude that made the west great.

That also realized the wet dreams of bankers, namely that of leveraging the most with what was perceived as safe, so as to be able to earn the highest risk adjusted returns on equity on what was perceived as safe, so as not having to lend the credit umbrella to risky SMEs and entrepreneurs.

Of course the west, with banks no longer financing the riskier future but only refinancing the safer present and past, and the sovereign, could, after that, only go in one direction, namely down, down and down.

Add to that the complications created by robots and automation. Those, on top of having to create jobs, now also require us to create decent and worthy unemployments.

The challenges for the west loom immense. To face these requires a neo Magna Carta that probably has to include something about a universal basic income, and of course getting rid of that insane mindset that came up with current bank regulations. That because, as Einstein said: “No problem can be solved from the same level of consciousness that created it”.


May 08, 2017

My Industrial Policy would be to try having the best robots, and the most intelligent artificial intelligence

Sir, I refer to Rana Foroohar’s “Wanted: an industrial policy for America” May 8.

The 2007/08 financial crisis resulted from excessive exposures to what had been perceived, decreed or concocted as safe, those assets which therefore regulators allowed banks to hold against very little capital. Examples: the AAA rated securities backed with mortgages to the subprime sector and loans to sovereigns like Greece.

That should have been more than enough proof that, distorting the allocation of bank credit to the real economy with risk weighted capital requirements for banks, was not the way to go. But they all left it at that. As a consequence, only because they were as “risky” discriminated against by bank regulators, perhaps hundred of thousands SMEs and entrepreneurs have since then gotten their requests for bank credit rejected, or priced much higher. So Foroohar’s referencing an “Obama administration playbook” as especially favorable to job creation, sounds way out of place.

Yes, it is great that any government focuses its interest on job creation, but sometimes it must also give considerable thought to what to do if those jobs are nowhere to be found. That is why some years ago I wrote: “We need worthy and decent unemployments”.

I am against protectionism but, at this particular moment, if it were up to me, I would protect all learning and developing opportunities that could help my grandchildren to have access to the absolutely best robots and absolutely most intelligent artificial intelligence.

That is because if they don’t have it, they will benefit less or, in order to compete, have to work much harder for less than others.

That is because the Chinese curse “May your children live in interesting times”, might soon be upgraded to “May your grandchildren live surrounded by 3rd class robots, and dumb artificial intelligence”. 

PS. Sir, my granddaughters are Canadian so this message is in fact directed more to Mr. Trudeau than to Mr Trump.

PS. Again, please FT you who are so without fear, dare to ask regulators the questions below and dare learn the truth.


Contrary to Gordon Brown, current bank regulators do not dare to take questions, they might not be able to answer

Sir, as truly responsible elite should behave, Lucy Kellaway takes society at task with her “There is nothing cute about innumeracy” May 8.

In it Kellaway refers to how a kid, almost 20 years ago, asked Gordon Brown, then Chancellor of the Exchequer, “what is 13 squared?” and got a correct answer.

I argue that the current risk weighted capital requirements for banks are dangerously nonsensical, and that is why I have been asking bank regulators many questions about these, during about 20 years too. I have not had that kid’s luck.

For instance, when I ask why they give what is AAA rated, that we know banks could be building up dangerous exposures to, a risk weight of only 20%, while the so innocuous below BB-, that which bankers would not touch with a ten foot pole, is handed a 150%, their eyes go blank, and they nod to each other either “what the hell is he talking about?” or “does he not understand that risky is risky and safe is safe?”

If I ask them how much they feel authorized to distort the allocation of bank credit to the real economy in pursue of an elusive financial stability, then they ignore me completely.

Frankly, how can a society allow its banks to be regulated by those that, knowing as they should that bank capital is to be there to cover for the unexpected, are so dumb so as to base their capital requirements on what’s expected?

Here follows a link to some of my many questions that have never received an answer.

How is it that “Without fear” FT, contrary to that young kid who asked Gordon Brown, does not dare to ask bank regulators these questions?


May 07, 2017

Low interest rates cause buy-backs, meaning less equity controlling assets and higher leverages. How will it play out?

Sir, you write: “the relationship between rates and the valuations of assets such as stocks is not simple. Ironically, if there is a bubble in stocks right now, excessive faith in and misunderstanding of the power of low rates might be a contributing factor. Central bankers keen to avoid crashes might explain this more clearly.” “Central bankers cannot blow bubbles alone” May 6.

In a sort of veiled way, IMF in its Global Financial Stability Report’s, “Where Are the U.S. Corporate Sector’s Vulnerabilities?” reports on this, when it states:

“The corporate sector has tended to favor debt financing, with $7.8 trillion in debt and other liabilities added since 2010. Bank lending to the corporate sector has continued to recover and could well rise further in response to more favorable market valuations. In contrast, equity finance has traditionally been outstripped by share buybacks and has recently leveled off. A drop in the cost of equity capital may stimulate equity financing, but it could coincide with higher corporate debt—particularly if additional share buybacks are financed through debt.”

That begs three questions:

First: How much of the recent increase in the stock markets is the result of buybacks; that which helps earnings per share to get a sort of artificial boost; that which results in less equity controlling the corporations?

Second: Do the recent stock-market prices increases duly reflect the increase riskiness derived from much higher corporate debts? 

Third: Have Central Banks therefore, with their low interests rate policies, dangerously lowered the capital (equity) requirements of corporations?

On the first two questions I have no answers, though just having to ask them should suffice to at least raise some eyebrows.

On the third the IMF seems to clearly respond, “Yes!” when on that same page, under the subtitle “High Leverage Combined with Tighter Borrowing Conditions Could Affect Financial Stability” it writes:

“As leverage has risen, so too has the proportion of income devoted to debt servicing, notwithstanding low benchmark borrowing costs. Although the absolute level of debt servicing as a proportion of income is low relative to what it was during the global financial crisis, the 4 percentage point rise has brought it to its highest level since 2010, which leaves firms vulnerable to tighter borrowing conditions. The average interest coverage ratio—a measure of the ability for current earnings to cover interest expenses— has fallen sharply over the past two years. Earnings have dropped to less than six times interest expense, close to the weakest multiple since the onset of the global financial crisis.”

Holy Moly! And interest rates have not yet returned to something more "normal"; and the Fed's balance sheet is still so huge it leaves little space for any future QE assistance...and not to speak of the already too large public debts. 

How will this all play out? I don’t know. Perhaps I’d better, like most, stick my head in the sand.


May 05, 2017

No Martin Wolf! You do not get good results, for all, with Brexit negotiations, arguing that the UK holds a weak hand.

Sir, Martin Wolf, with respect to Brexit negotiations writes: “Theresa May should have realised, above all, that she holds a weak hand: the costs of no deal would be far bigger for the UK than the EU.” “Britain has the chance to secure a smooth Brexit transition” May 5.

What? Weak hand? EU has more to lose from Brexit than UK. EU gets stuck with the Euro, and so many other unresolved differences, languages included, without having Britain as a calming unofficial arbitrator. How many EU countries does Wolf think that will be glad seeing UK leave, and would settle with a high indemnity payment?

That is the only starting point that can lead to a continuous amicable and useful for all Britain and EU relation.

The more all European citizens send that message to those dummkopfs in Brussels who want to play macho men, in order to get back at those who showed so much disdain for them that they wanted to leave, the better for all in Europe.

The local European governments should be especially alert and not allow some few technocrats in Brussels to decide their future relations with Britain. It is they who will pay the costs.

Everyone might be helped by an ad campaign along the lines of: "EU, Brussels’s technocrats share blame for Brexit. If you Europeans want an amiable separation, help keep them in check"

Britain, of course, do not let these arguments I make go to your head either. It’s all a quid pro quo.


May 03, 2017

Martin Wolf, how statist must one be in order to find favoring public debt over private sector debt so much normal?

Sir, Martin Wolf, on the first 100 days of President Trump writes: “The good news is that, albeit chaotically, he is governing more as an orthodox post-Reagan Republican than most expected. The bad news is that he is governing more as an orthodox Republican than most expected. This now seems true in all the main policy areas, both domestic and international. It is clearly true in economic policy… deregulation is still an objective.” “America’s pluto-populism laid bare” May 3.

Sir, let us analyze how regulators have “deregulated”.

Bank regulators, for their risk weighted capital requirements for banks, assigned a risk weight of 0% to sovereign debts and one of 100% to citizens’ debts, which allows banks to earn higher risk adjusted returns on sovereign debt; which of course make banks hold more sovereign debt that they otherwise would do.

Bank regulators, for their liquidity requirements, are classifying sovereign debts as the most liquid ones; which of course make banks hold more sovereign debt that they otherwise would do.

Insurance regulators are copycatting bank regulators

To top it up the Fed, with its QEs, has mostly purchased sovereign debts… and will mostly maintain sovereign debt on its inflated balance sheet.

All that clearly favors the Sovereigns’ access to bank credit over that of the citizens.

Such statism must presume, de facto, that government bureaucrats know better what to do with credit than the private sector. That presumption must lead of course to disaster. 

Yet Sir, here is Martin Wolf worried about deregulation that perhaps might make away with all this. Like Jeb Hensarling's proposal of a straight 10% leverage ratio.

Wolf expresses serious concerns about the tax cuts proposed by President Trump, concerns that many of us share. But my worries has more to do with the deficit ad new debt that might result, while Wolf’s probably has much more to do with the wish he so many times has expressed, namely that governments should take advantage of the (artificially low subsidized by regulations) low interest rates in order to do more, like investing in infrastructure.

In a letter published by FT in 2004 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. 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.” Clearly that applied to developed countries too.

PS. Sir, dare to ask regulators the questions in this link. You talk about voodoo economics, what about voodoo regulations? 


May 02, 2017

The Sovereign’s footmen, the regulators, are force-feeding the economy public debt. When will the liver explode?

Sir, Sam Fleming and Robin Wigglesworth report: “The Fed will need to operate with a much larger balance sheet than before the crisis — at least three times as big, say some investors — in part because of regulatory and other changes governing institutions’ appetite for safe assets” “Fed edges towards paring back its balance sheet” May 2.

Of course, in 1988 the Sovereign had his bank regulation footmen declare him risk free, 0% risk weight, while the citizens, they got a 100% risk weight.

When kicking with QEs the 2007/08 crises can down the road, the Fed as well as some other central banks, purchased enormous amounts of public debt.

With Basel III the regulators kept going at it introducing liquidity requirements that much favored “marketable securities representing claims on or guaranteed by sovereigns”.

Insurance companies’ regulators, with their Solvency II, are closely following the same path.

Now when they are thinking of reeling the 2007/08 can in, to sort of prepare for the next crisis, how is the Fed to do that? Well the authors report that accordingly to Mr Rajadhyaksha, head of macro research at Barclays: “Assuming that it wants to get rid of all its $1.8tn of mortgage bonds as it retreats from the home loan market, it may have to start buying Treasuries again at the tail-end of the process” which means more sovereign debt will be purchased.

In other words the Sovereign’s foot soldiers are de facto force-feeding public debt down the economy’s throat. When will the economy’s liver explode?

And the craziest thing is that most experts still take the interest rates on such debts to be market fixed, and to reflect the real risk-free rate.

How could so much statism have been injected in our system without it being noticed?

This statism de facto presumes that government bureaucrats know better what to do with credit than the private sector. That presumption leads of course to disaster. 

We now read in IMF’s Fiscal Monitor 2017 (page x), with IMF acting like the Sheriff of Nottingham for King John, that “the case for increasing public investments remains strong in many countries in light of low borrowing costs” and that “the persistent decline in the interest rates may have relaxed government budget constraints in advanced economies; if the differential between interest and GDP growth were to remain durably lower than it has been in past decades, countries could be able to sustain higher levels of public debt.” “Low borrowing costs” IMF? Do your research and dare to figure out why. Others are paying for that by having less access to credit.

Sir, IMF has the galls to title 2017 Fiscal Monitor as “Achieving More With Less”, while completely ignoring that over the last decades, Sovereigns, have been Achieving So Much Less With So Much More.