September 30, 2017

Canada needs a Universal Basic Income, 1st class robots and the smartest artificial intelligence, and to be daring

Sir, as a Venezuelan I am so lucky and so grateful for having two of my daughters and my two granddaughters living in Canada; and so of course I gave special attention to Tyler Brûlé’s “My plan to make Canada great again” September 31.

Except perhaps for that of “some form of national service with both defence and civilian functions”, and which because of my Swedish connections rang a bell with me, his other proposals left me quite indifferent.

I would instead suggest the following three things.

1. To prepare itself for the possibility of structural unemployment that could cause a breakdown of social order. This will probably require the introduction of a modest Universal Basic Income, a social dividend, and not paid by taking on more debt.

2. To gather all possible brain power in order to guarantee that future Canadians live surrounded and served by 1st class robots and the smartest artificial intelligence possible. Thinking of mine being dependent on anything lesser is just too horrible.

3. To immediately get rid of the risk weighted capital requirements for banks. These have banks staying away from financing the “riskier” future, like SMEs, and just keeping to refinancing the “safer” past, or basements in which to live. Risk taking is the oxygen of any development. God, make Canada daring!

PS. On Bombardier the following was my pro-Nafta tweet: “The fundamental question: Would Boeing build better airplanes in the future with or without competition from Bombardier? Keep the pressure!”


September 29, 2017

What extraordinary things since the crisis have central banks achieved? Having kicked the can down the road?

Sir, Alan Beattie writes: “By being prepared to embrace the radical in the face of ill-informed criticism… — central banks have achieved extraordinary things since the global financial crisis. It would be most peculiar if now, when the pressure on them has abated, they mistakenly returned to a model of monetary policy rooted in the pre-crisis era.” “Central banks have a duty to come clean about inflation” September 23.

Sir, since the global financial crisis have really central banks achieved extraordinary things for most? I am not so sure. In many ways it seems they have only dangerously kicked the crisis can forward, while leaving in place the regulatory distortions that caused the crisis

But indeed let’s come clean about inflation. What would the inflation be if:

Most stimuli had not gone to increase the value of what is not on the Consumer Price Index

If there had not been so much credit overhang resulting from anticipating demand for such a long time.

If there had not been an ongoing reduction in the costs of retailing much of what is recorded on CPI.

If non-taxed robots and other automations had not put a squeeze on costs

Then the inflation could have been huge… so what are central bankers so fixated on the CPI?

PS. What would the inflation be, if the I-phone was in the CPI? J


Monsieur Macron, more than a finance minister/ministry, Europe needs bank regulators who know what they’re doing.

Sir, Reza Moghadam lays out a proposal for a European finance minister/ministry that, though it “stops short of Mr Macron’s vision of fiscal union, with Europe-wide taxes and spending… focuses on the essential: a collective action mechanism for managing and stabilising economies in crisis.” “Macron is right — the Eurozone needs a finance minister” September 29.

Moghadam suggests the job description for that post should answer some key questions, and among these: “How can the risk of crises, and so fiscal payouts, be minimised? What would be the role of the minister in a crisis?”

The prime answer to the first question should be:

Getting rid of current risk weighted capital requirements for banks. These only guarantee that banks will hold the least capital, when a crisis, as usual, arises because of something that was ex-ante perceived as very safe turns out ex-post to be very risky.

The prime answer to the second question should be:

Make sure any stimulus, like QEs or low interest rates, flows freely so that the market has a chance to use it as efficiently as possible. This also requires getting rid of current risk weighted capital requirements for banks. These, by allowing banks to earn higher risk adjusted returns on equity on what is perceived safe than on what is perceived risky, seriously distorts the allocation of bank credit to the real economy.

Sir, in other words, much of what Europe could need from a finance minister, could be achieved by just firing the current inept bunch of bank regulators.

Basel II’s standardized risk weights of 150% for the below BB- rated and of 20% for the AAA rated, should be more than enough evidence on how little current regulators understand of banks and of finance.

Monsieur Macron, do you know bank regulators have decreed inégalité?

PS. Perhaps Monsieur Macron could ask his wife what has a better chance of causing those big bank exposures that can result in a major bank crisis, the ultra-safe AAAs, or the ultra-risky below BB-? I am sure Mme Macron would give him a more correct answer than what Mario Draghi would do; and this even though Draghi was the previous chairman of the Financial Stability Board and is now the chairman of the Group of Governors and Heads of Supervision the oversight body of the Basel Committee of Banking Supervision.

Perhaps Monsieur Macron should also ask Mme Macron what she thinks of 0% risk weights of sovereigns. Does she really think government bureaucrats know better than the private sector how to use bank credit efficiently? Reza Moghadam, who was previously at the IMF, has not expressed any sort of concern with that… but then again he is now the vice-chairman for sovereigns and official institutions at Morgan Stanley.


September 28, 2017

FT, do you really think bank regulators know what they are doing? Wake up!

Sir, Izabella Kaminska reminds us of “the fact that information is not the same thing as knowledge” “Imperfect information dims the vision of a digital utopia” September 27.

And she refers: “In a new paper, Nobel-winning economist Joseph Stiglitz, building on decades of work on the economics of information, argues that the information paradigm being promoted by technologists could — if left unregulated by government — lead to the sort of market distortions that constrain welfare creation and innovation for the long term.” 

Hold it there! Government regulations can also “lead to the sort of market distortions that constrain welfare creation and innovation for the long term”

Just look at how the regulators imposed risk-weighted capital requirements for banks that completely distorted the allocation of credit to the real economy.

Sir, do you really think bank regulators know what they are doing? Wake up! They have no idea.

Here two questions:

1. What are the risks banks could build up such excessive exposure to the below BB- rated so that, if the ex ante perception of super riskiness turned out ex post even more risky, that could cause a major bank crisis?

2. What are the risks banks could build up such excessive exposures to the AAA rated so that, if the ex ante perception of super safety turned out ex post wrong, that could cause a major bank crisis?

Hint! Mark Twain described a banker as he who wants to lend out the umbrella when the sun shines and wants it back as soon as it looks like it is going to rain.

Ponder now on that our bank regulators, in their own 2004 standardized Basel II risk-weights, assigned to the first possibility a risk weight of 150%, and to the second, one of only 20%.

Meaning that banks, given a basic capital requirements of 8%, when lending to the below BB- rated needed to hold a reasonable12% of capital, while when lending to the AAA rated, they were only required to hold a sliver of 1.6% in capital.

Meaning that banks, when lending to the below BB- rated, could only leverage some reasonable 8.3 times while, when lending to the AAA rated, they were allowed to leverage their capital (equity) a mindboggling 62.5 times.

Sir, do we really deserve such feeble minded regulators? If not, why do you keep supporting these?


You redistribution profiteers: There’s very little cash in “cash”; and wealth is mostly just frozen purchasing power

Sir, Eric Platt writes about “the lack of detail…typical of the 30 large US-domiciled companies analysed by the FT that hold more than $10bn of cash and other securities on their balance sheets”, “Patchy disclosure gives investors little to chew on” September 28.

The article should help to indicate to you how little real cash there really is in all that cash to which so many, time after time, including FT, have referred to in terms of that it should be repatriated, so as to put to better use.

As we can see, the fact is that most of the $262bn of cash and cash equivalent held by Apple has already been deployed, one way or another; which means that even if Apple does not use it for its own purposes, that does not mean it is not being used by others for other purposes.

Sir, the whole very valid debate about offshore wealth and growing inequality, would be greatly sanitized by the acceptance of the facts that there is very little cash in “cash”; and that wealth is mostly just frozen purchasing power.

Perhaps then we would also be allowed to discuss such political incorrect issues such as what assets would not exist but because of great wealth and great inequalities.

Then perhaps we could at last focus more on the much more important cause of fighting unproductive unequal wealth creation, than about how to getting our hands on wealth after it has been created.

Unfortunately the redistribution profiteers, those who need to instigate hate against wealth and inequality in order to maximize the value of their franchise, will fight tooth and nails in order to stop such debate taking place.


September 27, 2017

Would current bank regulators have even been allowed to come close to banks in 1899?

Sir, David Palfreyman, Bursar and Fellow, New College, Oxford, UK quotes an article in the Economic Journal (1899) by G H Pownall, advocating that “bank reserves” must be brought up to around 15 per cent on the basis that “To keep adequate cash reserves is a duty that bankers owe the State” and “To let reserves fall too low is reprehensible, and the offence should be penalised”. “Bank capital: an old argument holds good” September 27. 

I wonder what they would have had to say in 1899 about different capital requirements based not on possible ex post risks but only on ex ante perceived risks?

I wonder what they would have had to say in 1899 about a 0% risk weight assigned to the sovereign?

I wonder what they would have had to say in 1899 about a 1.6% capital requirement, meaning an authorized leverage of 62.5 to 1 if only there was an AAA or an AA rating present.

Sir, do you think our current bank regulators would have been allowed to regulate in 1899? I don’t!


The correlation between assets that caused the financial crisis 2007-09 and the lowest bank capital requirements is 1

Sir, Martin Wolf writes, “Since 2013, eurozone output per head has been rising at much the same rate as in the US. The main explanation for this turnround, beyond the normal cyclical forces, has been the determination of the European Central Bank, under Mario Draghi, to do its job properly.” “Creative reform is vital for the eurozone” September 27.

Well the job is clearly not over. Until now what has been achieved is basically to kick the can down the road. I wonder what forthcoming generations will say about Wolf’s “properly” and Mario Draghi’s “whatever it takes”?

The correlation of assets that helped cause the financial crisis 2007-09 and those assets perceived, decreed (Greece) or concocted as safe, meaning those assets that generated the lowest capital requirements for banks is 1. Since Europe and much of the world insist in using the risk-weighted capital requirements for banks that distorts the allocation of bank credit to the real economy, a vital bank regulation reform is still pending.

That this reform has no been carried out is caused by regulators, like Mario Draghi, not wanting to accept, or let it be known, what stupid mistakes they made. And with a little help from their friends they threw the dead cat of the crisis being caused by excessive risk taking by the banks on the table.

Wolf refers to a proposal by Adam Lerrick of the American Enterprise Institute for “a scheme for mitigating the impact of asymmetric fiscal shocks” by means of transferring “yields on government bonds of vulnerable countries rise relative to the stronger ones.” That sounds reasonable, but I would suggest that should have to begin by eliminating the regulatory subsidies to sovereign debt, so that one is really clear about who is strong and who is weak.


September 25, 2017

Social costs of different general bank capital requirements differ a lot from those of different risk weighted ones.

Sir, Michael Savage writes that though “Martin Wolf asserts that a fivefold increase in banks’ capital requirement is simple and almost without social costs… A study by William Cline of the Peterson Institute finds that each percentage point increase in capital to total assets reduces long-run gross domestic product by 0.15 per cent.” “A safer banking system demands tough trade-offs” September 25.

Indeed different general capital requirements may represent different social costs, but these would not even come close to the social costs of having different risk weighted capital requirement. That is because the latter distort the allocation of bank credit to the real economy.

Unfortunately the social costs of those distortions are rarely or even never discussed. At least you Sir seem not to be interested at all in that.


If central banks offered “unimpeachably safe liquid assets” to all, how much negative interests would these pay?

Sir, George Hatjoullis writes: “Only the central bank can provide unimpeachably safe liquid assets…[so] allow individuals and corporate entities to hold deposit accounts with the central bank… The banking system would be free to pursue its risky credit provision role and individual entities would have their safe liquid haven”, “Allow deposit accounts within central banks” September 25.

That is based on two false premises. The first one is that central banks really are riskless. Though they can always print money, there’s no guarantee they won’t print too much money, and therefore repay with money worth less.

The other is that you could provide some with “unimpeachably safe liquid assets… a safe liquid haven” at no costs. The opportunity cost of that, is not sharing into the benefits of risk taking.

When it comes down to risk management I always start by asking: “What risk is it that you can least afford not to take?” That is because the worst certainty comes hand in hand with the avoidance of all risks.

Sir, to allow some to have access to unimpeachably safe liquid assets, while others take the risks, just guarantees putting inequality on steroids. The society should not do that! An adequate bank system allows everyone to share, at least ever so slightly; in the risk-taking the society needs to move forward.


September 23, 2017

That 2007-08 crisis resulted from excessive risk taking by banks, is a dead cat thrown on the table by regulators

Sir, Tim Harford writes: “bold lies have become the dead cat of modern politics on both sides of the Atlantic. Dramatic lies do not always persuade, but they do tend to change the subject — and that is often enough. It is hard to overstate how corrosive this development is. Reasoned conversation becomes impossible”, “The fatal attraction of cynical falsehoods” September 23.

The Basel Committee for Banking Supervision, with Basel II in 2004, and for the purpose of setting the capital requirements for banks, assigned a risk weight of 20% to the AAA rated and one of 150% to the below BB- ones.

Since an AAA rated borrower is very much less likely to default than a below BB- rated, at first sight this could seem reasonable.

But precisely because of these perceived risks, banks lend much more and at much lower interest rates to the AAA rated, and very little or nothing, or anyhow at much higher interest rates to the below BB- ones.

And therefore, when it instead comes down to what poses more dangers to bank systems, and if applying the same weights, it would be the AAA rated that carried the 150%, and the below BB- the 20%.

So, as a result of allowing banks to leverage 62.5 times, as long as an AAA rating was present, (or even more in the case of sovereigns like Greece), excessive exposures to “the safe” were created and a super-crisis exploded.

But then the regulators, friends and admirers lay on the table the argument of it all having resulting from excessive risk-taking by banks.

That surely has all the characteristics of a dead cat but, when one tries to raise this issue the regulators, and undercover economists, they all shut up like clams.

Sir, since risk weighting the capital requirements dangerously distorts the allocation of bank credit to the real economy, we can’t allow for that to go on, and so we must insist in getting that dead cat off the table.

Unfortunately it would seem you also want that dead cat to remain on the table


September 22, 2017

The interest rates on public debt are distorted by QEs and bank regulations. Seemingly no one dares to research that

Sir, Baroness Ros Altmann, when commenting on Martin Wolf’s (“Capitalism and democracy are the odd couple” of September 20, writes:

“Global central banks have artificially distorted capital markets for several years, by creating vast amounts of new money to buy sovereign debt. The supposedly “risk-free” interest rate, on which much of the system depends, has been undermined (and she concludes)… it is important to consider the democratic dangers to capitalism which prolonged QE may pose. ” “Disguised fiscal measures play role in democratic recession” September 22.

She is absolutely correct, and I have over the years written for instance Martin Wolf numerous letters on it.

But there is also the regulatory distortions provoked by the risk weighted capital requirements for banks introduced in 1988 with Basel I, and which assigned a 0% risk weight to sovereigns.

That meant at that time, and well into current Basel III times, that banks needed to hold little or no capital when lending to sovereigns; meaning banks were authorized to leverage immensely when lending to sovereigns; meaning banks could earn fabulous risk adjusted returns on equity when lending to sovereigns; meaning banks would lend too much and at too low rates to sovereigns.

So, when to QEs we add this through-the-back-door regulatory subsidies to government borrowings from banks (and now with Solvency II extended to insurance companies) it is absolutely clear we have no idea what the real cost of public debt is; and so we are all flying blind… and government bureaucrats having much easier access to bank credit than SMEs or entrepreneurs.

Last November, during IMF’s Annual Research Conference, I got at long last one of the major experts, in this case Olivier Blanchard, to agree with me in that “lets make sure that we have removed all the distortions which we can, which affect r (rates), so we have the right r”.

Sir, as of this moment that was the last time I have heard about it.

Why is there no response? Perhaps the answer is found in Upton Sinclair’s “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”


Why would some not participate in needed societal risk taking, but have right to unimpeachably safe liquid assets?

Martin Wolf writes: “The most important purpose of money is to serve as a safe source of purchasing power in an uncertain world.”, "Why banking remains far too undercapitalised for comfort" September 22. 

I am not sure that means to allocate bank credit efficiently to the real economy, but if it does then I agree.

But that purpose was absolutely absent from regulators’ minds when, because of an insane risk aversion, they decided to allow banks leverage much more the capital required by regulations when lending to “the safe”, than when lending to “the risky”.

The result was henceforth that banks would be able to earn higher risk adjusted returns on equity while lending to the safe than when lending to the risky. That, which allowed bankers to realize some wet dreams and big bonuses, completely hindered banks from fulfilling their purpose.

We read: banks “remain highly undercapitalised, relative to the risks they bear.” That is a misleading statement. Banks remain highly undercapitalized relative to the risks of the assets considered by regulators to be safe, is a more correct way to describe the reality.

Wolf holds: “This system is designed to fail” Of course it is. To allow banks to hold less capital against those assets that have always provoked major bank crises, namely those ex ante perceived as safe, cannot but result in making the failures even more dangerous.

The truth is that current bank regulators are too inept for comfort.

Wolf also refers to all “these proposals try to separate the risk-taking from the public’s holdings of unimpeachably safe liquid assets”

To me such proposals are the product of obnoxious social/financial engineering mindsets.

Unless we limit it to perhaps the value of one year’s median salary, why on earth should the public have the right to unimpeachably safe liquid assets… and why on earth should it not have the right, and the duty, to participate in the risk taking a society needs to move forward?

And just the expectation of “unimpeachably safe liquid assets” introduces a huge systemic error.

To follow that recipe, in an economy depressed by lack of risk taking, would have the remaining risk takers end up with all the negative interests earned by the risk avoiders… talk about putting inequality on steroids and feeding lines to populists.

No way Martin Wolf, that is not the way my western world got to where it is… that is not the road I want my world to take for my grandchildren.

Am I opposed to higher bank equity? Of course no, though I do not feel that much more than ten percent is needed… as long as it is ten percent for all… sovereigns, AAA rated and housing finance included.

To require 20%, a leverage of five to one, while leaving in place any kind of risk weighting adjustments, could just worsen current distortions.

PS. Wolf refers to Mervin Kings book “The end of alchemy” but that book had nothing to say about “the alchemy of risk-weighting” to which he now refers to, and about which I have written hundreds of letters to him over the years.


September 20, 2017

Risk weighted capital requirements for banks expresses a venomous lack of confidence in the future

Sir, Martin Wolf writes “the financial crises that destroyed globalisation in the 1930s and damaged it after 2008 led to poverty, insecurity and anger. Such feelings are not conducive to the trust necessary for a healthy democracy. At the very least, democracy requires confidence that winners will not use their temporary power to destroy the losers. If trust disappears, politics becomes poisonous” “Capitalism and democracy are the odd couple” September 20.

No! Free flowing not encumbered by crony statism capitalism is about as democratic it can be.

But one of the pillars of current bank regulations is that when banks lend to or invest in something perceived as safe they are allowed to leverage more their equity than if that is done with something perceived as more risky. That means banks can obtain much higher risk adjusted returns on equity financing the safer present than financing the riskier future.

The 2008 crisis resulted from too much exposure against too little capital to “safe” AAA rated securities, or to sovereigns decreed safe, like Greece.

The minimal response of the real economy to all stimuli, like QEs, is in much the result of “risky” SMEs and entrepreneurs not having a competitive access to bank credit.

To top it up a zero risk-weight of governments with one of 100% of citizens has nothing to do with democracy and all to do with statism brought in through backdoors.

“Democracy says all citizens have a voice; capitalism gives the rich by far the loudest.” Indeed but self appointed besserwisser regulators gave “the safe” more voice than “the risky.”

Wolf’s article ends with “After the crisis, hostility to free-flowing global finance is strong on both right and left”.

Mr. Wolf, that hostility was preceded, and caused, by that insane regulatory hostility against free-flowing bank credit, about which you have decided to keep mum on.


September 18, 2017

The numbers of ads on Facebook and Google need to be limited, and those clicking these should also be paid something.

Sir, Rana Foroohar, with respect to those services we supposedly receive free from Goggle, Facebook and similar for free, correctly writes “free is not free when you consider that we are not paying for these services in dollars, but in data, including everything from our credit card numbers to shopping records, to political choices and medical histories. How valuable is that personal data?” "Big tech makes vast gains at our expense", September 18

Indeed, more than 10 years ago I wrote you a letter in which I said: “Clearly a search engine should mostly be valued in terms of the services it offers to the searchers but in this case it is actually the searchers that become the searched and this leads to some very strange signalling effects”.

And since then I have been all over the web promoting among others the possibility that we should be able to get an intellectual property right over our own preferences, in order to have sometRhing to negotiate with… and then on how we could enter into agreements with ad-blockers that could help us exploit those IPRs.

But lately what has also come to concern me, is how our very limited attention span is being overexploited, leaving us too little time for reflection on our own realities.

Would it not be great if Google or Facebook, or any such similar social media service we get hooked on, and which has over a million members, could only send each member ten adds per day, and that these would receive 50% of any ad revenues collected as a result of having clicked on the ad?

Under no circumstances should we humans allow the marginal cost of bothering us to be zero.

I believe that could benefit all parties involved. Even Google, Facebook and alike would be less harassed by the besserwisser. Don’t you think so Sir?


September 17, 2017

Has Brexit and Trump just been too much for Martin Wolf to handle?

Sir, on December 30, 2009 Martin Wolf wrote: “the civilisation we pray survives for our descendants is indeed at stake”, "The challenges of managing our post-crisis world", December 30.

As a father, then not yet even a grandfather, I shared entirely that concern: "The monsters that thrive on hardships haunt my dreams"

But now it would seem that Wolf has given up all hope, as when he seemingly in panic writes: “As a species, our power is now too great to afford today’s essentially uncontrollable competition among myopic states. I do not expect us to achieve a world government. But that is also why I expect humanity to do unimaginable damage to itself and the planet over the coming centuries”, “What’s the big — and the bad — idea?” September 16.

And to avoid those “unimaginable damages to” humans, Wolf would now “like to see a world government. It would be a confederation, with a governing council, no president. Maybe three consuls.”

What on earth as gone into Wolf’s mind, what would that guarantee us?

In April 2003, when as an Executive Director of the World Bank I commented on the World Bank's Strategic Framework 04-06, I opined: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

So Sir, for me to substitute with some three besserwisser the wisdom of all us individual humans, is sort of the last thought that enters my mind.

On the contrary, what we must do is to increase the changes for the most insignificant of citizens, like me, to question the wisdom of any self or network appointed consuls of the world.

For instance Wolf could do much good by helping me ask bank regulators why on earth they decided to assign a risk weight of only 20% to what is AAA rated and which therefore could provoke the creation of dangerously high bank exposures; while giving the below BB- rated, those so innocuous because bankers won’t touch them with a ten feet pole, a whopping risk weight of 150%.

Sir, I do feel sorry for Martin Wolf, I suspect Brexit and Trump has been too much for him, it has short-circuited his great mind.


Worse than odious debt that some might feel urgently needed, is odious credit that needs not to be given

Sir, Robin Wigglesworth writes: “An archaic, often-mentioned but never-invoked legal doctrine called “odious debt” could be tested for the first time in history in Venezuela should the regime be ousted from power.” September 12.

I feel that for us citizens, everywhere, even more important than the concept of odious debt, is to define a legal doctrine on “odious credit”, this for the simple reason that the first would not exist without the latter.

In other words, are we to hold an uneducated trying to survive day-by-day thug like Nicolas Maduro, to higher moral standards than those highly educated in Goldman Sachs’ who, if their education is worth anything, should be able to survive without financing badly masqueraded violations of human rights? I think no!

Sir, we do need a Sovereign Debt Restructuring Mechanism, urgently, but if such an SDRM is really to mean something good for the world, then the concept of odious credit has to be an integral part to it.


September 16, 2017

When frozen in other types of “cash”, it is hard to free up cash to spend on good causes without losing much value

Sir, I refer to “Debt Collectors” September 16, in which Eric Platt, Alexandra Scaggs and Nicole Bullock search to explain what could happen to the “portfolio of cash, securities and investments worth roughly $840bn, held outside the US by just 30 US companies, because of tax reform designed to … encourage American companies to bring back jobs and profits trapped overseas”.

The article, though it refers to difficulties such as the “repatriation process itself could involve selling bonds” and the impact of that on interest rates, fails to illustrate the whole truth.

The reality is that all that “cash”, as well as all that “cash” held by other wealthy (for instance in Panama) except for the less than 1% that could be in real cash, is in other assets like securities investments, perhaps even in art collections.

So, in order to convert all that “cash” into real cash, those other assets have to be sold to others who are then required to give up their real cash for these. And, in that process, clearly a lot of the value of the “cash” would just change hands or disappear.

Why are these difficulties of converting “cash” into cash not more discussed? Because doing so would be sort of inconvenient for those redistribution profiteers who try to sell their politically beneficial envy, for instance that present in the “one percenters being against all us 99 percenters” theme.

What is a £20 million flat in London or a US$200 million Picasso hanging on a wall but the voluntary freezing of millions in alternative purchase power that could be out there in the economy competing for consumer goods… and generating inflation? Is a lowering of the value of hard-assets the inflation driver central banks want?

PS. Of course the above does not take away one iota of the need to relentlessly pursue those who have accumulated “cash” assets illegally, and might hold these in places like in Panama.

September 14, 2017

FT, it would have been easy pie to predict the crisis 2007-08 had to happen, had you only dared question bank experts

Sir, Matthew C Klein writes: “Lots of people were supposed to prevent the financial crisis…most policymakers, risk managers, and academics failed in their responsibility to protect the rest of us. After the fact, the common defence was that the crisis so complex and unusual that it would have been impossible to predict “Anyone awake in the 1980s should have known about the dangers in the 2000s” Alphaville September 13.

Complex? Not at all! And you do not, as Klein usefully suggests, need for that to go back to what happened in the 1980s and 1990s.

Sir, just dare answer! If regulators allow banks to leverage their equity 60 times or more just because an AAA rating or a friendly sovereign is present… does that not doom banks to disaster? Of course it does!

Here are some examples of what I wrote:

October 1998, Op-Ed in Venezuela: “History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”

November 1999, Op-Ed Venezuela: “The possible Big Bang that scares me the most, is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

September 2002, Op-Ed Venezuela: “What a nightmare it must be to be a sovereign risk evaluator! If they underestimate the risk of a given country, it will most assuredly be inundated with fresh loans and leveraged to the hilt.”

January 2003, letter published by Financial Times: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

March 2003, in a formal discussion at the Executive Board of the World Bank: “The sole chance the world has of avoiding the risk that entities such as the Basel Committee, accounting standard boards and credit rating agencies introduce serious and fatal systemic risks, is by having an entity like the World Bank stand up to them, instead of sort of fatalistically accepting their dictates."

April 2003, commenting on the World Bank's Strategic Framework 04-06 "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

May 2003, in comments made at a workshop for regulators at the World Bank: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

May 2003, Op-Ed Venezuela: “In a world that preaches the worth of the invisible hands of the market, with its millions of mini-regulators, we find it so strange that the Basel Committee delegates, without protest heard, so much responsibility in the hand of so very few and human-fallible credit rating agencies”

October 2004, in a written statement delivered as an ED at the Board of the World Bank: “We believe that much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions”

November 2004, in a letter published by the Financial Times: “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?”

But yet you Sir have silenced me, only because you think I am obsessed with the risk weighted capital requirements for banks. I tell you Sir, indeed I am, and you should be too!

I tell you Sir, indeed I am, and you should be too!

Per Kurowski

New office habitats, promoting communal discussions, will force robot headhunters to consider social skills much more

Sir, John Gapper when discussing new open space offices that are intended to intensify creative communications writes that “companies should start by recognising what their employees fear losing” and among this, is obviously “privacy”. “Tech utopias drive workers to distraction” September 14, 2017

But the need for privacy is not only based on a wish of being alone but quite often much more on the wish to avoid some. In this respect it must be expected that social skills will be much more important when robots or artificial intelligence evaluates candidates in the future, because you cannot risk having absolute bores or pain-in-the-ass employees roaming around freely.

Evaluating human social skills? Now that’s a new challenge for artificial intelligence. I wonder what Watson has to say about it? Perhaps, a test-period in which all co-workers could use a point system to evaluate candidates? Would such discriminatory procedures be politically acceptable?

Sir, do your current headhunters discriminate candidates based on their social skills?

PS. How will robot recruiters treat their human ex colleagues they left without jobs? 


September 13, 2017

No matter how much influence Warren Buffett might have, his is nothing when compared to bank regulators'

Sir, Robin Harding writes: “Mr Buffett is brilliant at buying into monopoly profits, but he does not start companies or gamble on new ideas. America is full of entrepreneurs who do. Celebrate that kind of business. It is the kind America needs”, “How Buffett broke American capitalism” September 13.

And Harding also argues “however much you admire Buffett, his influence has a dark side because the beating heart of Buffettism, is to avoid competition and minimise capital investment in the real economy”

But what do bank regulators do? They tell banks that if they lend to or invest in what is perceived as safe, they need little capital, Basel II even allowed banks to leverage 62.5 times with what corporate asset carried an AAA rating.

And they tell banks that if they lend to or invest in what is perceived as risky, like to “risky” entrepreneurs who “start companies or gamble on new ideas” then they need more capital which means lesser possibilities of high risk adjusted returns on equity, which means banks will not lend to these.

If that is not “minimizing capital investment in the real economy”, what is?

Frankly when compared to the destructive influence current bank regulators have on the real economy, whatever bad influence Warren Buffett might have is inconsequential.

And at least Warren Buffett makes profits, while current bank regulators just make everything worse. That since they completely ignore those ex ante perceived safe pose much more ex post dangers to banks than those perceived risky.


Low interest rates stimulate laziness in project execution and in revision of investment decisions

Sir, Izabella Kaminska is not going to be much loved today as she bravely points out to many the very uncomfortable possibility that they might have fallen head over heels “for fanciful narratives or investor cults”. Well done! That is going to generate a lot of soul-searching. “Cultish long-termism can hobble investors” September 13.

I would though like to remind Kaminska that much of “investors’ forgiving attitudes” could be explained by current extraordinary low interest rates. Just like these introduce much laziness in the execution of projects these can also provoke fewer revisions of investment strategies. Also, do not the sheer existence of negative interest rates help fuel the “grandeur of the futuristic visions being touted”?

PS. I would not refer to Andrew Haldane as a great champion for long-termism. As a regulator he has supported the extraordinary short-termism imbedded in the risk weighted capital requirements for banks. These keep banks from financing the “riskier” future our grandchildren need to be financed, having them basically just refinancing the “safer” present.


September 12, 2017

Our biggest problem with Internet, Google, Facebook, Twitter, is that our attention span scarcity is not duly valued

Sir, you write: “It is clear that Google, Facebook, Twitter and a few others have become an important part of the social fabric. The dissemination of fake political news around elections in the US and Europe has illustrated as much”, “New realities confront a maturing Internet” September 12.

I don’t get it. If there was any “fake political news around elections in the US and Europe” that was that Hillary and Remain were shoe-ins. And although the dissemination is important the fact is that others produced these news… mostly the political correctness clans.

But let me get to the real issue here. We humans do not have more than 7 days a week with 24 hours each with 60 minutes each and 60 seconds each. That’s all! And social media is claiming more and more of that limited attention span and there is little we can do about it, if we do not want to disconnect entirely.

Perhaps if anyone outside our circle of friends would want to send us a message, like a fake news or an irresistible click-ad, had to pay us something, then we could perhaps align the incentives better. Some could charge one cent per message, others one dollar and perhaps a Nobel Prize winner or an important politician 100 dollars for 30 seconds.

If it were so, many more would think differently about losing their time with their silly useless messages… and we would all live happier.


Having experienced Saudi-Venezuela’s Plan, I know Saudi Arabia’s “National Transformation Program” will fail

Sir, Jason Bordoff writes about Saudi Arabia’s “National Transformation Program, a bundle of targets and initiatives designed to deliver the “Vision 2030” plan to diversify the country’s economy and reduce its reliance on oil revenue… head-spinning 543 initiatives and 346 targets… laudable focus on concrete targets, measurable outcomes, transparency and accountability, along with a strong focus on boosting the education and skill levels of Saudis.” “Saudi Arabia’s reform slowdown reveals its painful dilemma” September 12.

That sounds so much like Venezuela’s ambitious plan of how to deploy the booming oil revenues, plus all that indebtedness that oil riches stimulated, during Carlos Andres Perez first presidency, 1974-79, a time that even became known as that of Saudi-Venezuela.

That plan provided clearly insufficient results, something that later helped clear the road to power for populist Chavez. Chavez and Maduro, in about 15 years, then managed to turn an even greater oil boom into the current pure minuses.

What amazes me is that Bordoff seems to imply that there is a possibility that the NTP could work. It does not! Centralized oil revenues, topped up with “$100bn for a public investment fund”, all managed by “a complex government bureaucracy” is a recipe for disaster. And if by any chance they got something right, that could be so easily wiped out by new generation of besserwisser government technocrats.

Before my two years as an Executive Director of the World Bank, 2002 2004, my only experience with the government sector was as the first Diversification Manager at the Venezuelan Investment Fund set up in 1974. That gig lasted me only two weeks because, when pressured by politicians for a fast approval (one week) of a US$ 2 billion pet project (Plan IV Sidor), I knew the system would not work and, as I told the Fund’s board members when I resigned, I was too young to risk being hanged if that or other projects failed.


September 11, 2017

Bank regulators need Business Education… perhaps Finance professors too… if not, they sure need History Education

Sir I refer to your special magazine “FT: Business Education”, September 11, 2017.

If you were a banker, of that type that until 1988 (Basel I) existed for about 600 years, you would, in order to obtain the highest risk adjusted return on equity, and while keeping a close eye on your whole portfolio, lend money to whoever offered you the highest risk adjusted interest rate… of course as long as all your other costs were covered.

If for instance you had to hold 10% capital, perhaps so that your depositors or regulators felt safe, then your expected return of equity would be the average of those net risk adjusted interest rates times 10 (100%/10%)… this before taxes of course.

If an SME or an entrepreneur offered the bank a perceived risk adjusted net margin of 1.25% while an AAA rated only offered 0.75%, the banker would in that case naturally prefer giving the riskier borrower the loan... though probably it would be a much smaller loan.

Sir, do you agree with that? No? Why?

Because when bank regulators introduced risk adjusted equity requirements, they completely changed banking. Since then the risk adjusted net margins borrowers offered, have to be multiplied, by the times these margins can be leveraged on equity.

For instance Basel II, 2004, with a basic 8% bank capital requirement, assigned a risk weight of 20% to any private sector exposure rated AAA, which meant banks needed to hold 1.6% (8%*20%) against these exposures, which meant they could leverage equity 62.5 times (100%/1.6%).

That same Basel II assigned to for instance an unrated SME or entrepreneur, a risk weight of 100%, meaning a capital requirement of 8%, meaning banks could leverage only 12.5 times their equity with this type of loans.

So now what happened? The AAA’s 0.75% net risk adjusted margin offer would become almost a 47% expected risk adjusted return on equity, while the riskier’s 1.25% would only represent about a 16% expected risk adjusted return on equity. Therefore the bank would now by much prefer the AAA rated… Bye-bye SMEs and entrepreneurs.

To earn the highest perceived risk adjusted ROE on the safest, must clearly be a wet dream come true for most bankers; well topped up by the fact that requiring so little capital from their shareholders when lending to the “safe”, left much more profits over for their bonuses.

Did not regulators know their risk weighted capital requirements would distort in this way the allocation of bank credit to the real economy? Seemingly not and that is why I suggest they should go and get some basic business education… after the professors who did not see this have also gone back to the most basic basics.

That because, if regulators did know about the distortion they would cause, then they have no idea of history… or worse, they are financial terrorists. That because no major bank crisis have never ever resulted from excessive exposures to what is ex ante perceived as risky; these have always, no exceptions, resulted from excessive exposures to what was ex ante perceived, and never ever from what was ex ante perceived as risky.

Sir, come to think of it you and most of your collaborators, perhaps all, should also go back to a business education 101.