December 31, 2018

The Fed and bank regulators have done many times more harm to the real economy than the political leadership, President Trump included.

Sir, Rana Foroohar writes:“It is clear that the power of monetary policy to support the real economy has diminished. In lieu of better political leadership, the key task for central bankers in the years to come may be to roll up their sleeves and do the gritty work of bolstering not the markets, but Main Street.” “Central bankers refocus on Main Street” December 31.

That’s not likely to happen. The Fed and bank regulators have clearly evidenced they are not up to that task. Without the slightest consideration to how banks are to serve the real economy, and its needs for development, with their risk weighted capital requirements for banks, they blocked “the risky” Main Street’s access to bank credit, in order to favor all that which was perceived (or decreed) as safe… like residential mortgages (and the sovereign) 

Now every one of them will eagerly be trying to escape his or her responsibility, by blaming Donald Trump, who in many ways is acting as a perfect godsend scapegoat.

PS. “We are almost 10 years into a recovery cycle — the time when economic slowdowns typically occur”. That might be so, but it still sounds so expertly besserwisser. 


December 28, 2018

European banks that leveraged more than 40 (25) times were (are) not banks; only scary betting propositions.

Sir, Stephen Morris, summarizing the state of European banks writes, “Poor profitability, outdated business models, negative rates and little cause for optimism have driven investors away”“Europe’s banks languish in a climate of gloom”, December 28.

As I see it, something leveraged way over 40 times, as many European banks were before the 2008 crisis, should hardly be called bank. When regulators went along with some bankers’ plea to reduce the capital the banks needed to hold, perhaps for bankers to be able to pay themselves larger bonuses, they simply destroyed the bank system that was. 

If I was a regulator, and wanted my banks to grow stronger than their competitors, the last thing I would do, is to allow them to hold little capital.

The regulators, with Basel II in 2004, showed they believe banks could leverage 62.5 times with assets that have obtained an AAA to AA rating. The market initially believed their risk-weighing capacity and valued banks accordingly. The markets, after 2008, no longer believe such nonsense; “There is better risk-reward elsewhere,” one fund manager is here quoted to have said.

The European Commission assigned a sovereign debt privilege of a 0% risk weighting, meaning no bank capital requirement, to all those sovereigns within the Eurozone that take on debt denominated in a currency that de facto is not their domestic (printable) one. The market had blamed Greece for its excessive public debt and is only now beginning to wake up to that statist horror.

Morris writes: “One activist is trying to force it to exit large swaths of the business, arguing it absorbs too much capital for too little return”. That does not mean capital is unavailable for banks.

Do you want bank investors to return? Then offer them to invest in well-capitalized banks with well-diversified portfolios. To invest in banks that values the highest first class loan officers, not some bright equity minimizing financial engineers.

PS. Seeing “Mary Poppins return” reminded me of why good old George Banks went to fly a kite.


President Trump seems to be on route to become one of the greatest “paga-peos” (scapegoats) in history.

Sir, Gillian Tett writes that for her “money, there is another, darker, way to interpret this week’s [extreme volatility in US equity markets]. Two years into Mr Trump’s presidency, global investors are questioning the administration’s financial credibility…Steel yourself to cope with further turbulence triggered by Mr Trump”,“Expect more turbulence from Trump’s Fed fight”, December 28.

Indeed, president Trump is to be blamed for some of it, but the truth is that had the markets been more normal, not so much bubbled-up, he would only cause some ripples never Tsunamis.

That Trump has given indications to fire Jay Powell, the Fed chair, is bad in as far as it interferes with the necessary independence and credibility of a central bank. But, that said, let me also hold that, if a central banker or a regulator believes that what bankers perceive as risky is more dangerous to bank systems than what they perceive safe, and therefore use credit distorting risk weighted bank capital requirements, as they’ve done for a long time, that is a clear justified cause for their removal.

Venezuelan historians sometimes recount that in old days the refined ladies of the society always used to keep a young slave close by. Whenever they let out noisy and smelly gases, they would hit the slave hard and loudly on his head spelling out “Boy/Girl!” whichever applied. These useful blame-takers, scapegoats, were known as “paga-peos”, literally “fart-payers”.

Sir, President Trump clearly produces some gases himself, but he could also go down in history as one of the greatest paga-peos ever.

When booming equity markets, house prices and unsustainable debt levels everywhere, built up with easy bank credit, huge liquidity injections and ultra-low interest rates come crashing down, as they must, sooner or later, those who are much more to blame for it, could all jointly point at President Trump and shout “He did it!” and Ms. Tett might smilingly nod in agreement.

PS. Though in Spanish here you will find more interesting details about the “paga-peos” tradition and about how it can be used with even worse intentions.


December 27, 2018

A governance code that forces regulators to clearly define the purpose of banks is much needed.

Sir you write, “From January 1, a revised corporate governance code will apply to UK-listed companies, for instance. It now states that the board’s duty is to ‘establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned’”. “Taking the measure of good corporate culture” December 27.

Sir, if only such code had existed and been applied by bank regulators.

As is the risk weighted capital requirements for banks which so dangerously distorts the allocation of credit to the real economy, were developed without any consideration to what is the purpose of banks, that is unless you think that being a safe mattress into which to stash away cash, is all that banking is about.

If “What are banks for?” had been asked, the Basel Committee would not have allowed banks to leverage much more with “safe” residential mortgages than with “risky” loans to entrepreneurs, those who could perhaps help to create more of the jobs needed in order to be able to service the mortgage and pay utilities.

You also write: “The Banking Standards Board, set up in 2015 to help the UK sector regain trust, runs an annual assessment of members, monitoring areas from honesty to accountability with a staff survey, focus groups and interviews.”

Sir, with respect to accountability, has that Board ever asked regulators why they think that what bankers perceive risky is more dangerous to our bank systems than what they perceive as save?


One country, setting the example of a very high carbon tax, and sharing out all its revenues equally among all its citizens, would be a real game changer, in so many ways.

Sir you correctly argue, “Time is running out for us to halt dangerous rises in temperature…this is no longer a scientific or technological challenge, it is far more a political and social one.”, “How to rescue the global climate change agenda” December 27.

But when you hold “The depressing reality about climate change is that we could solve the problem, at manageable cost” that is not necessarily so. Sir, let’s face it, the truth is that there are way too many whose real interest, more than solving the challenges of climate-change, is to profit from the process, whether financially or politically, whether they are aware of it or not.

I’m as concern as anyone with the problem but in my case I really did not mind so much president Trump’s blindness, since I have always thought of the Paris agreement in terms of being just an interesting photo-op that would serve as a very dangerous pacifier.

So to align political and social incentives; to allow the market signaling how the problems should be best tackled; and to keep costly profiteering out of the process, I have for years thought the best alternative is a very high carbon/pollution tax which revenues are shared out in their totality equally among all citizens.

Why does that idea not meet more interest? The answer is clearly that the redistribution profiteers see that route as one that could very dangerously affect the value of their franchise, since there could be pressure for the revenues to be redistributed to all, a sort of unconditional variable basic income, should also for instance include all income generated by any existing gas/petrol taxes.

Our planet that I often refer to as our pied-à-terre needs a champion that decides to go down this route to set an example to follow. My grandchildren are Canadian so I would love Canada showing the way.

PS. This is exactly what I proposed how Mexico City should tackle its serious pollution problems in a letter you kindly published in May 2016.


December 25, 2018

Let us issue shares fed with some results of our economy to all of us, and then worship these.

Sir, Rana Foroohar asking “At what point does bad corporate behavior become willful malfeasance?” writes, “Facebook is the natural culmination of 40 years of business worshipping at the altar of shareholder value.” “Facebook puts growth over governance” December 25.

Really? If all the incredible developments around Facebook, Google, Apple, Amazon, and Microsoft and similar, results from “worshipping at the altar of shareholder value” then perhaps we should issue a share to each citizens that feeds on a substantial part of profits, like those of Facebook, or taxes, like carbon taxes, and have us all worshipping these shares, instead of trusting the acts of genius politicians or bureaucrats with agendas of their own. 

Those shares, which would pay out an equal unconditional societal dividend to all of us, is by the way what a Universal Basic Income is all about. 

Of course, as usually comes with new developments, there are new and serious problems, and data privacy is one of them. Foroohar asks “ Have we reached one of those watersheds when US and European authorities are going to step up and do something about it? Let us beware, there’s no guarantee that would not be even worse. 

Foroohar says she is reminded of “bank executives who had no understanding of the risks built into their balance sheets until markets started to blow up during the 2008 financial crisis” 

I am though more reminded of regulators who allowed banks to leverage over 60 times their equity with what rated as AAA could be very dangerous to our bank system, and less that 8.3 times with what rated below BB- bankers do not like to touch with a ten feet pole. I am reminded of regulators who assigned a risk weight of 0% to the sovereign of Greece, and thereby doomed that nation to its tragedy.


The crisis of modern liberalism is caused more by authoritarian besserwisser distortions than by market forces.

Sir, Wolfgang Münchau writes: Margaret Thatcher’s successful brand of entrepreneurial capitalism in the UK in the 1980s… Through the sale of council houses, she turned tenants into property owners.”, “The crisis of modern liberalism is down to market forces” December 25.

True, but later immense injections of liquidity, ultralow interest rates, and extreme preferential risk weighted capital requirements for banks when financing the purchase of houses, has helped turn houses from being just homes into being investment assets. That of course has left all those who do not own these investment assets, even further behind.

Therefore I cannot agree with Münchau’s conclusion that liberalism is failing because of market forces. At least in this case the distortions are not caused by market forces, but by regulators and central bankers who have insufficient idea about what they’re doing. Of course, if crony statism forms part of market forces, which perhaps de facto it sadly could be, then I would be wrong.

When Münchau finally opines, “Any system that leaves behind 60 per cent of households will eventually fail” that is not necessarily so. The world is plagued by examples by how such systems have too often proven to be even more resilient than those who do not. On a small model scale, just look at how Venezuela’s current regime has been able to hang on to power for at least a decade more than it should have been able to.


Why should Goldman Sachs financing 1Malaysia Development Berhad (1MDB) be worse than it financing Venezuela’s Maduro’s regime?

David Crow and Laura Noonan in an FT The Big Read write, “Goldman is under increasing scrutiny over its role in underwriting $6.5bn of bond offerings for 1MDB in 2012 and 2013, a service for which it reaped a hefty $600m in fees and trading gains. After the money was raised, $2.7bn was allegedly siphoned off by the Malaysian financier Jho Low, who is accused of masterminding the fraud, to pay for a lavish lifestyle and to bribe Malaysian officials.” “Tim Leissner: Goldman Sachs banker at the heart of 1MDB scandal” December 24.

GS, in exchange for their money obtained $2.8billion Venezuelan bonds paying a 12.75% interest rate, which if repaid would provide GS with about a 42% yearly return, 2.000% more than what US pays. Is that not bribing foreign government officials and should therefore perhaps fall under the Foreign Corrupt Practices Act of 1977?

With respect to money being siphoned off, if anyone in GS doubts that much of that loan did not go the same route, then the days of GS are soon over. Such naiveté does not survive in the world of finance.

We are now in December 2018, and still not the slightest sign of a "Sorry Venezuelans" from Lloyd Blankfein. An elite, aware of its true responsibilities, would be shaming Lloyd Blankfein… and surely not inviting him to their homes. 


December 17, 2018

If there’s a re-vote on Brexit, what will the Remainers suggest Britain remains in?

Sir, Jeff Colegrave makes a well reasoned case of why, if there is a new vote on Brexit, it is on the Remainers’ shoulders to make very clear what they are supporting to remain in. “Remainers risk hubris without a positive case for the union” December 17.

The three outstanding problems Colegrave wants to have a clear definition on are:

How the Eurozone can avoid that a generation of youth becomes again sacrificed, on the altar of the common currency.

How the EU can avoid manifestly failing to adequately address the issue of migration. 

And “the lack of democratic political architecture within the European project, [which] cannot lightly be dismissed as some kind of arcane irrelevance. 

I could not agree more. I would be a committed Remainer, only if EU shows clear intentions to stop being such a Banana Union. You do not build a real United European States with a bureaucracy such as that currently present in Brussels.

Let me be clearer yet. If a Remain wins, the last thing British citizen, or all of their other EU citizens colleagues need, is for that to be presented as a triumph or an endorsement of Brussels.

PS: With respect to the sacrifices on the altar of the common currency, I have sent you many letters, in which I have blamed EU authorities for the tragic over-indebtedness of many euro sovereigns, when assigning to the public debt contracted in a currency that de facto is not their domestic (printable) currency, for purposes of bank capital requirements, a 0% risk weight. But of course these letters are ignored, because Per Kurowski suffers just an obsession about current bank regulations. 


December 15, 2018

Even the best central bankers can mess it up, royally

Sir, Tim Harford writes: “A flint-hearted technocrat can at times deliver better results for everyone. In the early 1980s, Fed chair Paul Volcker demonstrated the basic idea that inflation could be crushed by a sufficiently badass central banker.” “Stop sniping at central banks and set clear targets” December 16.

Indeed, and Paul Volcker was a hero of mine too, that is until I realized his role as the facilitator of the risk weighted capital requirements for banks.

In his book “Keeping at it”, penned together with Christine Harper, Paul Volcker writes: “The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be…. At the end of a European tour in September in 1986, at an informal dinner with the Bank of England’s then governor Robin Leigh-Pemberton… without a lot of forethought, I suggested to him that if it was necessary to reach agreement, I’d try to sell the risk-based approach to my US colleagues.”

And that was that! In that moment, accepting the European nonsense that what bankers perceive as risky is more dangerous to our bank systems than what banker perceive as safe, Paul Volcker, a central banker, helped condemn us to suffer especially severe bank crisis, resulting from especially large exposures, to what was especially perceived as safe, against especially little capital. I thank him not!

Harford opines “The health of our democracies demands that our politicians start taking responsibility again”

Absolutely! And with respect to bank regulations that requires the politicians to ask for explanations like: Why do you risk weigh the assets based on their perceived risk and not on their risk based on how bankers perceive their risk? Have you never heard about conditional probabilities?

PS. The Basel Committee document that provides an explanation on the portfolio invariant risk weighted capital requirements does not make any sense to me, but perhaps Tim Harford understands it. If so could you please ask him to explain it to us? 


December 12, 2018

Only a very dependent statist central bank would assign its sovereign a 0% risk weight.

Sir, Lord Skidelsky writes, “The failure of central banks to prevent — or even foresee — the 2008 financial crash stems directly from their acceptance of Eugene Fama’s efficient market theory, which implied that commercial banks needed only light regulation.” “Central banks should not set economic policy” December 13.


The risk weighted capital requirements for banks, by which banks, according to Basel II, could leverage limitless with sovereigns, 62.5 times with AAA to AA rated, and only 12.5 times with risky entrepreneurs and SMEs is anything but light regulation. It is a very heavy handed intervention.

Lord Skidelsky rightly says: “Most of the money pumped into the economy by quantitative easing leaked out into the financial and real estate sectors rather than stimulating the real economy”. Yes, but that was primarily so because some inept besserwisser regulators were/are convinced that what bankers perceive as risky, is more dangerous to our bank system than what bankers perceive as safe; and those having assets are usually perceived to be safer, something which ain’t necessarily so. 

Sir, also, let me be clearer yet; a central bank that agrees with a 0% risk weight of the sovereign is far from independent; it is a very dependent statist central bank.


What produces more bread? An economy with all consumers being equal, or one with some being filthy rich?

Sir, David Redshaw quotes John Kenneth Galbraith from his 1929 book The Great Crashwith: “The rich cannot buy great quantities of bread.” “Excess wealth can lead to speculative froth” December 13.

True, but when the rich transfer their purchasing power by buying assets that would often otherwise not be demanded, might that not be causing others to have job opportunities that would allow them to buy greater quantities of bread, than would have been the case without the rich?

And Redshaw goes on to say “The economy is motored by the regular and reliable spending of a confident workforce rather than by the mega rich, whose erratic and luxury-end spending always seems to end in boom and bust.”

Really? When has an erratic and luxury-end spending by the mega rich ended in a boom and bust? Last time I looked it was poor buyers of homes in the subprime sector in the US, empowered by being packaged into AAA rated securities, these securities in its turn empowered by regulators who allowed European banks and US investment banks to leverage more than 60 times their capital with these only because they had an AAA to AA rating, which ended in boom and bust.

Sir, never forget that a paper is also measured by what it allows to be published.


The risk weighted capital requirements for banks have helped cause an utterly dysfunctional capitalism.

Sir, Martin Wolf, after reviewing Colin Mayer’s “Prosperity”,Jonathan Tepper’s and Denise Hearn’s The Myth of Capitalismand Deborah Hargreaves “Are Chief Executives Overpaid?” writes, “These books suggest that capitalism is substantially broken. Reluctantly, I have come to a similar conclusion. This is not to argue for the abandonment of the market economy, but for better companies and more competition” “Rethink the purpose of the corporation” December 13.

Sir, one of the most important tools of a functional capitalism, is the ability to channel efficiently the savings into investments. The most important artery for that have, for a couple of hundred years, been our banks. But our bank regulators, with their risk weighted capital requirements, that which allow a higher leverage with what is decreed or perceived as safe than with what is perceived as risky, have sadly clogged up those arteries.

To “Rethink the purpose of the corporation”? Much more important is for the regulators to define the purpose of the banks, beyond that of being a safe mattress into which stash away cash.

I challenge Mr Wolf to find, in all current Basel Committee bank regulations, a word about the purpose of banks being intermediating credits efficiently. 

Wolf also writes: “We should be explicitly encouraging a thousand different flowers of governance and control to bloom. Let us see what works.”

Absolutely… and that’s why, as an Executive Director of the World Bank, in an official statement I held that "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.”

Sir, and what when a globalized best practice is based on such a loony theorem that what bankers perceive as risky is more dangerous to our bank systems than what bankers perceive as safe? Are we not then globalizing stupidity?


December 11, 2018

Europe, if you spoil your kids too much they will not grow strong. That goes for banks too.

Sir, Patrick Jenkins analyzes several concerns expressed about European banks when policymakers gathered to mark the retirement of Danièle Nouy from ECB’s Single Supervisory Mechanism (SSM); who is to be succeeded by Andrea Enria as the Eurozone’s chief banking regulator. “As European banks regulator retires, six big challenges remain” December 11.

The former Grand-Chair of the Federal Reserve, Paul Volcker, in his recent book “Keeping at it”, co-written with Christine Harper, recounts the following when, in 1986, the G10 central banking group tried to establish an international consensus on bank regulations and capital requirements:

“The US practice had been to asses capital adequacy by using a simple “leverage ratio”-in other words, the bank’s total assets based compared with the margin of capital available to absorb any losses on those assets. (Historically, before, the 1931 banking collapse, a ten percent ratio was considered normal)

The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be.”

Sir, even though the Basel Accord was signed in 1988 and further developed in 2004 with Basel II, and with which the European risk weighting was adopted, I am sure we can trace the differences between US and Europe banks to these original differences on capital requirements. The US has been much more strict on capital than Europe. In fact the problems with American banks during the 2008 crisis were mostly restricted to those investment banks, which supervised by the SEC, had been allowed in 2004 to adopt Basel II criteria.

In Europe meanwhile banks could do with much less capital, which meant that much more was left over for bankers’ bonuses. In essence, Europe’s banks were dangerously spoiled. The challenge these now faces is having to substitute their equity minimizing financial engineers with good old time loan officers; and convince the capital markets of that. Good luck!


December 05, 2018

To save the earth, start by saving it from phony saving-the-earth profiteers

Sir, Martin Sandbu writes about “how a conflict of interests over climate change — something that really is humanity’s common challenge — aligns with and reinforces a deeper culture war dividing centrist urban elites from system-critical populists… [So] we have missed the potentially much greater obstacle of political polarization in the age of populism” “The burden of tackling climate change must be shared”, November 5.

Hear hear! This is exactly the type of issues and challenges we must learn to tackle, if there’s going to be any hope for us to survive as the society we always dreamt of, or avoid turning into that society we always dread, something that in fact means even more than our survival on earth.

But, when Sandbu speaks about what “reinforces a deeper culture war dividing centrist urban elites from system-critical populists”, I disagree, because the real hard core divide in this case is between those expected to pay for to help save our planet, and those who expect to profit from those efforts.

But Sandbu also refers to a remedy to that, when he mentions, “the carbon ‘fee and dividend’ approach advocated by climate scientist James Hansen [which] would levy duties on fossil fuels and redistribute the revenue in equal per capita amounts to all residents”

If Emmanuel Macron, perhaps hand in hand with Canada’s government that is also thinking about higher carbon taxes, decides that all revenues from taxes on fuel, and similar, are to be shared out equally among all citizens, that would set an example to other nations, that would at least be worth some ten Paris agreements.

Sir, let me be cleat about it. If I am going to help to save the world, by paying higher carbon taxes, I want all of it translate into a clear market signal that saves the planet, and not into something which unduly enrich those promoting saving the world, or those profiteering on the process.


December 04, 2018

An ESM European bond insurance scheme would make Eurozone sovereign debt crises bigger and more likely

Sir, Michael Heise, chief economist at Allianz writes: “An idea that might be capable of preventing or at least mitigating bond market dislocations is a European bond insurance scheme [operated by the European Stability Mechanism]… It avoids the heavy political burden of debt mutualisation and austerity regimes, actively encourages private sector lending and reduces contagion between sovereign debtors.” “Insurance tackles danger of sovereign bond shockwaves” December 4.

Heise explains:“A critical issue would be the setting of the premiums… A simple formula could apply: the triple A refinancing costs of the ESM, plus a risk premium that reflects both the rating of the country and any progress it has made on its public finances.”

It all sounds very rational, and such an insurance scheme would obviously be very useful for some in the case of a sovereign debt emergency. The harder and more important question though would be whether the existence of such scheme makes a sovereign debt crisis more likely or not.

For the purpose of the risk weighted bank capital requirements EU authorities assigned a 0% risk weight to all those sovereigns within the Eurozone, even though these de facto do not have their public debt denominated in a local domestic (printable) currency, the euro.

That stopped the markets from sending the correct signals and helped caused for instance Greece to contract public debt way in excess of what it should have done. 

Heise correctly states: “Set the insurance premiums too low and it degenerates into a disguised eurobond, a bond whose liability is jointly shared by eurozone countries.”

Sir, there is no doubt in my mind that those insurance premiums would be set way too low by any Eurocrats, and so in fact an ESM European bond insurance scheme would act as another non-transparent sovereign debt pusher, and thereby make any crises likelier and bigger. And that’s not the way to go about solving the challenges posed by the Euro twenty years ago.


December 03, 2018

To understand how the west might be lost it is important to remember how it was won.

Sir, Martin Wolf when reviewing Paul Collier’s “The Future of Capitalism” titles it as “An important analysis of how the west was lost” December 3.

I have not read it yet, but I will be attentive to if Collier gave the film “How the West was won” or John Kenneth Galbraith’s “Money; whence it came, where it went”, or something similar, any consideration when writing this book. That because risk-taking is the oxygen of any development and current regulators, having imposed on banks loony and dangerous risk adverse risk weighted capital requirements, have helped set the west on a downward path.

Wolf does tell us that Collier is for some “updated Henry George type taxation of rent on land, [arguing] we need to tax more forms of rent, including that from agglomeration, which now goes to lucky individuals and businesses.”

I assume “agglomeration” refers here to land and other assets? Of course, if that agglomeration produces cash-rents thenthose rents should be and are already mostly taxed, but, if not, then, if taxed, land and assets would have be sold, at ever lower and lower prices. How would that asset value deflation solve any problems?

Wolf writes that Collier’s starting point is one on which surely everybody agrees: “Deep rifts are tearing apart the fabric of our societies.” 

Indeed, but as I feel it, much of it is the result of polarization and redistribution profiteers having been so empowered by social media to merchandize their products of hate and envy.

Sir, I’ll stop here until I have read the book.


If elites do not socially sanction those they should sanction, there’ll be no society left to sanction.

Sir, Laura Noonan writes “Goldman Sachs is considering a special surveillance programme to monitor higher-risk employees in far-flung locations so the bank can demonstrate that “lessons have been learnt” from the 1MDB scandal” “Goldman eyes monitoring of high-risk staff after 1MDB”, December 3.

Great, but they should also monitor high-risk bosses in home office locations, like Mr. Lloyd Blankfein. And I here refer to that lending by him and Goldman Sachs to a notoriously inept, notoriously corrupt, notoriously human rights violating regime of Venezuela’s Maduro.

Do I want Goldman Sachs’ Lloyd Blankfein to be punished by the justice? No! I much prefer the elite; universities, media among others should do that, shaming him, by socially sanctioning him, by for instance not inviting him to anything.

Sir, do not give Lloyd Blankfein, or an unrepentant Goldman Sachs, one inch more of space in the Financial Times, they do not deserve it.

PS. To this date Lloyd Blankfein has not been able to find in himself to utter the slightest “I’m sorry Venezuelans”.


Why is it not obvious that what bankers perceive as safe must, by definition, be more dangerous to our bank systems than what they perceive as risky?

Sir, Jonathan Ford writes, correctly, “One concern with using risk-weighted assets is that bank bosses can influence the calculation by tweaking the asset number”, “Money to burn at the banks? It all depends on how you count it” December 3.

But you really do not have to go there to be very concerned, it suffices to ask yourself: What is more dangerous to our bank systems, that which bankers perceive as risky, or that which bankers perceive as safe?

And then you do not have to use bankers models, it suffices to know that in the standardized risk weights of Basel II, the regulators themselves assigned a meager 20% risk weight to the rated AAA to AA, that which really could be dangerous (like in 2008) and a whopping 150% weight to the innocous below BB- rated, that which bankers won’t like to touch even with a ten feet pole.

I agree with those wanting a straight equity requirement for banks, a leverage ratio, like Mervin Kings’ 10% or Professor Anat Admati’s 15%, but much more than for the safety of our banks, I want that so as not distort the allocation of bank credit to the real economy. 

Sir, I am convinced that, a 0% bank capital requirement, with no supervision of banks, with no deposit guarantees to its depositors, would be much better for our real economies, and much safer for our banks systems, than the current dangerous regulatory nonsense… which only guarantees especially big crisis, resulting from especially big exposures, to something perceived as especially safe, against especially little bank capital.

Unfortunately, you seem to believe our bank regulators really know what they’re doing… or is your motto “Without fear and without favour” just a marketing ploy?


November 30, 2018

When EU authorities assigned Greece a 0% credit risk they doomed that nation, inexorable, to suffer a real life Greek tragedy.

Sir, Lord Aldington, defending a Remain writes: “Greek tragedies seldom have a happy ending; they are about inexorable fate. There is nothing inexorable about being wilfully blind to our situation. Integration works on the basis of partnership.” “Enter the tragic Chorus, tearing at their clothes and screaming” November 30.

Indeed, Hear, hear, but let us also not forget that the partnership Lord Aldington supports, caused a real life Greek tragedy. When the European Commission assigned Greece a 0% credit risk, it doomed it, inexorably, to tragically excessive debts, which to top it up, are denominated in euros, de facto not Greece’s domestic (printable) currency.

If they do not get rid of the statist, distortive and dangerous risk weighted capital requirements for banks; there will be many more similar Greek tragedies in EU, and around the world.


Hercules Poirot, as a bank regulator, would be much more watchful of the “safe” than of the obvious risky.

Sir, Gillian Tett reminds us that “Any fan of Agatha Christie mystery books knows that distraction is a powerful plot device: if there was a commotion in the kitchen, detective Hercule Poirot would look for a body in the library, or other clues being hidden in plain sight, amid the noise.” “Federal Reserve attack is just a distraction”, November 30.

Indeed, but she could rest assure that Poirot, if cast as a bank regulator, would laugh at his current colleagues who show so much concern with what seems obviously risky, like when they in Basel II assign a risk weight of 150% to what’s rated below BB-, and so little about what seems very safe, like giving only a 20% risk weight to what’s rated AAA and is, therefore, if wrong, truly dangerous for the bank system.

Ms. Tett argues here that President Donald Trump “uses weapons of distraction more effectively than almost any leader before him”

She could be right but also, when GDP and inflation data are fraught with may uncertainties or outright errors, to hear the Fed discussing the “neutral rate”, could also be an intent to distract from the fact that they find themselves in that “dark room” deputy Fed chair Rich Clarida is quoted to have mentioned, and so that they therefore have not the faintest idea about what’s going on, and much less about what to do. 

Sir, when not knowing the answer to a question, proceeding to with a firm voice give an answer nobody is guaranteed to fully understand, also qualifies as a high quality distraction.

PS. That 20% risk weight of the AAA to AA rated, translated to a capital requirement of only 1.6% (8%*20%) which meant the banks were allowed to leverage mindblowing 62.5 times with such assets (100/1.6) which translated in to the cause numero uno for the 2008 crisis. 


November 28, 2018

Loony risk-weighted capital requirements block entrepreneurs’ access to fair credit.

Sir, Eric Schmidt writes“Right now, the UK, the EU and the US share a growing problem: we are experiencing a market failure in the way we support entrepreneurs.” “Our narrow view of entrepreneurs squanders talent”, November 28. 

Absolutely! But some market failures are government produced. 

If a bank lends to someone wanting to buy a house, something perceived as safe, the regulators allow it to hold much less capital that if it lends to an entrepreneur, something perceived as risky. 

So if a bank lends to someone wanting to buy a house, something “safe”, it will be able to leverage its capital much more than it can do if it lends to an entrepreneur, something

So if a bank lends to someone wanting to buy a house, something “safe”, it will be able earn much higher expected risk adjusted returns on its equity than it can do if it lends to an entrepreneur, something “risky”. 

But was it always this way? Of course not! This happened when bank regulators introduced the risk weighted capital requirements for banks. That which is based on that truly loony concept that what bankers perceive as risky, is more dangerous to our bank system than that what bankers perceive as safe. 

Since then millions of credit requests have been either negated or if approved, have had to support a higher than needed interest rate. 

Schmidt also writes about the need to “drop the tunnel vision promoted by many academic and professional specialisations”.

Absolutely! I have often argued that had there been: 

a plumber or a nurse disturbing the regulators’ group-think with an innocent question like “what has caused big bank crises in the past?” 

or a professional that had taken a course in conditional probabilities

or someone (incorrectly) quoting Mark Twain with “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”, 

or a golfer asking “why would you assign more handicap strokes to good players taking these away from lousy players like me?”, 

then the 2008 crisis would not have happened… and Lehman Brothers would still be alive and kicking.

God make us daring!


November 23, 2018

Which bonds, the high-yield or the low-yield, cause the most sufferings when things go wrong?

Sir, Robert Smith quotes Inge Edvardsen, head of fixed income sales at Pareto Securities with “High-yield bonds offer high returns with associated risks but it is of course unfortunate when our clients suffer losses”, “Dreams turns to Sweden for high-yield deal as UK retailing debt feels strain” November 23.

Similarly Edvardsen could have said “Low-yield bonds offer low returns with associated risks but it is of course unfortunate when our clients suffer losses” 

So let me ask you Sir, which of the bonds, the high-yield or the low-yield, do you associate with clients suffering the most when things go wrong?

I have no doubt; it is the low-yield-low-perceived-risk ones, because these usually attract the highest portfolio exposures at the lowest risk compensation premiums.

But, our bank regulators, they think differently; they think the high-yield-high-perceived bonds cause more sufferings, because those would be the bonds against which they would require banks to hold more capital.

It’s all so dangerously loony to me. Our current bank regulators have clearly confused ex ante risks with ex post dangers, and they have not the slightest idea about what conditional probabilities mean.

Sir, it sure surprises me that you seem to agree with the regulators.


November 22, 2018

Worse than Italy “sleepwalking into instability” is the European Commission pushing the Eurozone into it fully awake.

Sir, Jim Brunsden and Miles Johnson writes the European Commission stepped up action on Italy’s rule-busting 2019 budget, warning that its plans to stimulate the economy through increased borrowing, risks “sleepwalking into instability”. “Brussels warns Italy’s budget threatens ‘instability’” November 22.

Of course, as Pierre Moscovici, EU economy commissioner, says: “this budget carries risks for Italy’s economy, for its companies, for its savers and its taxpayers”.

The sad fact though is that reaching an acceptable agreement on the budget issue would still be like papering over Italy’s and EU’s real underlying problems, not solving much.

The European Commission must/should know: 

1. About the challenges the Euro imposed on Eurozone members and that it has, for soon twenty years now, done nothing to resolve. 

2. That, for purposes of bank capital requirements, assigning a 0% risk to all sovereign borrowers within the Eurozone, those who de facto have their debt not denominated in a domestic (printable) currency, is a regulatory subsidy that impedes markets to signal the real costs of sovereign debt; which will necessarily cause many of its members to incur in dangerous excessive levels of public debt.

Before EC face up to these issues and does something real and sustainable about it, though much mightier, it has still not earned much right to lecture Italy.

Just like all regulators and central bankers, believing that what bankers perceive as risky is more dangerous to our bank systems than what bankers perceive as safe, have no right to lecture us on risk management.

EU can’t keep forcing its members to walk the plank, as it did with Greece, and still remain a viable union. Anyone against a Brexit and for a Remain should be very aware of that… that is unless his position has nothing to do with EU and all to do with local politicking.


FT, I have two questions and one observation to make about the securitisation and privatisation of student debt in UK.

Sir, Thomas Hale writes that after “the biggest privatisation of student loans…the first of a series of anticipated transactions that stand to create a market for graduate debt in the UK, the parliament’s spending watchdog concluded the government received too little in return for what it gave up”. “Spending watchdog criticises student loans privatisation” November 22.

The Department for Education, DfE, answered it was “confident that we achieved value for money for taxpayers… as Student loans are designed so that borrowers only repay when they can afford to [which] only means many students will never fully pay back their loans”

I have two questions and one observation to make

First question: Before a student has his debt packaged into a security to be sold off to investors, should he not have the right to make a preemptive offer for it? Not that it makes a real difference but, emotionally it might not be the same for some to owe their government than to owe Goldman Sachs  their student debt.

Second question: If taxpayer should receive value for money for all these student loans, should not those who are supposed to help students to repay their debts, the professors, the universities also have some skin in the game? I mean at this moment it would seem they get all the benefits from the students taking on debt, at no cost or risk for them.

I recently tweeted: Have you ever seen a university stating a normal investment disclosure like: “Warning, if you pay us for your studies by taking on debt, you might not earn enough to repay it.” 

Hale writes: “Securitisation, a process where assets are packaged together and sold on as bonds to investors, ranging from pension funds to alternative asset managers”

It is with respect to that I would like to make an observation, namely that of reminding that securitization is basically like making sausages, the worse the ingredients, the higher the profits. So pension funds, please beware!


November 21, 2018

Bank regulators from developed countries kicked away the ladder of risk-taking for the developing ones

Sir, Mohamed El-Erian writes: “the global economy is losing momentum and the divergence between advanced economies is growing… the majority of developed economies are yet to adopt meaningful pro-growth measures”, “Faltering developed world economies raise the risks for equity investors” November 21

Sir, Friedrich List in “The National System of Political Economy” 1885[1]wrote that free trade was the means through which an already industrialized country “kicks away the ladder by which it has climbed up, in order to deprive others of the means of climbing up after it.” 

In a similar way I would argue that the Basel Committee, with its perceived credit risk weighted capital requirements for banks kicked away from the developing countries that ladder of risk-taking that had been the oxygen for helping to get the developed countries where they are.

In 2007 at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I introduced a document titled“Are the Basel bank regulations good for development?

In it I tried to explain that prioritizing as it does bank lending to the safer present over that to the riskier future is not how a nation can develop.

But worse, the fact that the developed countries also promote these regulations means they are now reversing their development; and they will also have to confront especially horrible crises… those caused by especially excessive bank exposures to what is ex ante especially perceived as safe, but that ex post turn out risky, against especially little bank capital.


[1]List, F. 1885. The National System of Political Economy, translated by Sampson S. Lloyd from the original German published in 1841. London: Longmans, Green, and Company.

November 19, 2018

Italy’s problems are not all of its own making; much is caused by a regulatory mistake committed by bank regulators and the European Commission.

Sir, Franco Debenedettiwrites “The flexibility accorded by Brussels was used neither for reducing the debt, nor for implementing the ‘painful structural reforms to promote growth’ [and] The budget actually under examination by Brussels is all about more public expenditure employed for giveaways and does nothing to improve productivity and growth of the country, “A bargain with Brussels looks unrealistic”, November 19.

He is correct, in that, but he leaves out a crucial element that is an essential part of current realities.

Basel II, approved in June 2004, held that banks as Italy was rated at that time, AA-, needed to hold 1.6% in capital against Italy’s sovereign debt. Currently rated BBB, banks were supposed to hold 4% in capital against that debt. But the European Commission then surpassed those per se already extremely generous and pro statist capital requirements. Through “Sovereign Debt Privileges” it assigned a 0% risk weight on Italy’s sovereign debt; which meant banks did not need to hold any capital against it.

That allowed (or in reality forced) Italy’s banks to end up with a huge overexposure to Italian sovereign debt in Euros, a debt that de facto is not denominated in Italy’s domestic (printable) currency.

What to do? Any solution is going to hurt, but one has at least the right to ask whether Italy, as was Greece, should have to carry the whole costs of a mistake committed by the European Union authorities.

To top it up, there is no way one can improve productivity and growth of any country that distorts the allocation of bank credit to the real economy, as do the risk weighted capital requirements for banks.


In a “world full of uncertainties”, how come regulators are allowed to bet our banks on the certainty of perceived risks?

Claire Jones reports that Olli Rehn, a possible contender to replace Mario Draghi opines that Central bankers must have “the ability and agility to manoeuvre though the current world that’s full of uncertainties” “Central bankers face a ‘world full of uncertainties’” November 19.

This is exactly what is wrong, they do accept there are uncertainties all around, but then they are not capable to utter a word when regulators, with Basel II, bet the banks on certainty, by allowing banks to leverage 62.5 times their capital with an asset if only a human fallible credit rating agency had assigned it an AAA to AA rating. 

According to Jones, Rhen agrees with Draghi in that “if Italy wanted ECB help, it had to sign up to a bailout programme from the European Stability Mechanism”. That de facto means that Italy must have to walk the plank as Greece did. 

But, I see not a word about the European Commission “Sovereign Debt Privileges”, that which set a 0% risk weight on Italy’s Euro denominated public debt, that which allowed (or in reality forced) Italy’s banks to overload on that debt. Why should Italy (or Greece), in a Union, have to carry the whole costs of a mistake caused by the Union?

Rhen opines “The only legitimate way of making monetary policy, be it conventional or unconventional, is to look at the economic development in the euro area . . . in its entirety”. He is absolutely right, but then the question is, why have EU not done anything real, in 20 years, to solve the challenges posed by the Euro to the individual nations of that entirety?

Those challenges if not solved, soon, pose a real existential threat to the European Union. Does Olli Rhen really believe that completing a banking union would suffice to take care of that?


November 18, 2018

These are the houses that Jack built, baby, and their prices reaches up into the sky

Sir, I refer to Merryn Somerset Webb’s “UK property: The recent gains could turn out to be a huge historical anomaly” House and Home, November 17.

I would argue that more than an anomaly we are living the results of a humanly understandable political mistake of historical proportions, namely that of trying to make houses affordable by means of many preferential conditions.

After society, God knows why, decided that a home owned was much more valuable than a home rented, many different favors were awarded the purchasing of houses, many like those Somerset Webb describes, but also some other much harder to detect.

For instance, regulators decided that since they perceived residential mortgages as very safe, banks would be allowed to hold comparatively little capital against these. Since banks could therefore leverage much more with residential mortgages than with many other assets, banks had higher incentives to give a house buyer, who otherwise would not be able to buy a house, an easy credit.

That easy credit to the first buyer increased the demand of houses, so houses prices in general went up; and so the next time when a second buyer also wanted help to afford the house, you had to supply him with even more easy credit than what you helped the first buyer with… and so up and up and up it goes…

And those who own houses benefit and feel enriched by the increase in the price of houses are happy, while those who have not been able to jump on that bandwagon feel more and more frustrated, because the see their dream of a “real” home being made less and less affordable. That is of course something that the redistribution and polarization profiteers try to capitalize on.

And parents, so as to get their children out of the basement, now have to use their house to obtain the finance needed in order to help their children to make the down payments on the houses they want to buy. The sad story is that if banks had not invested so much in “safe” residential mortgages and had perhaps invested more in loans to entrepreneurs who could give them jobs, the children would have been able to afford, on their own, the lower priced houses. 

And so houses morphed from being only homes into also being investment assets. How much of current high house price is represented by the home value and how much by the easy credit value is anyone’s guess, but it sure would be interesting to see how much of their prices.

Whatever, the moment all those investment assets are to be cashed in by too many at the same time, for instance to cover some retirement costs, it will be ugly, for house owners, and for the banks, and for the taxman who has also been so much financed by the house bubble, in fact it will be ugly for all.

It all makes me remember Alan Price’s “Oh my, my, my, my, my, my, my, it makes you wanna cry. This is the house that Jack built, baby, and it reaches up into the sky”

These were the houses that Jack built... with plenty of easy credit, and which were taxed by the taxman


November 17, 2018

Should not a “State of the European Union” analysis be an indispensable document, when searching for a solution to the Brexit vs. Remain quantum entanglement?

George Parker and Alex Barker discussing the “brutal reception in cabinet and in parliament the Brexit withdrawal agreement received mention one cabinet minister saying: “The people who are criticising the deal don’t have any alternative, that was true before the Chequers meeting, it was true before this week’s cabinet meeting and it’s still true now. People can suck their teeth and say it’s a betrayal and talk about vassalage, but they don’t seem to have given any thought to what the alternative might be.” “May heads for a hard sell” November 17.

In terms of Brexit mechanism that might be true, but there is of course also the alternative of holding another referendum, which might provide a Remain instead. 

What I sorely miss in the whole Brexit vs. Remain heated discussions is a “State of the European Union” analysis that would help to bring some perspective on it all, and that could also be useful to all Europeans, independent from what happens down the line.

I say that because I sincerely think the EU is not doing well, and that there are huge problems brewing there, which sometimes, like yesterday, have me thinking that though Brexit is an absolutely awful solution, a Remain could be even worse.

Sir, could you imagine the national embarrassment for Britain to change its mind and go for a Remain, and then finding EU gone? 

PS. Quantum entanglement is a physical phenomenon which occurs when pairs or groups of particles are generated, interact, or share spatial proximity in ways such that the quantum state of each particle cannot be described independently of the state of the other(s), even when the particles are separated by a large distance—instead, a quantum state must be described for the system as a whole.


November 16, 2018

Stress tests for banks, performed by mighty regulators, signify dangerous systemic risks, as well as useless predictors

Sir, Caroline Binham reports on how “Andrea Enria, the outgoing head of the European Banking Authority, who is set to become the Eurozone’s top banking regulator, has questioned the value of its stress tests of lenders’ balance sheets, arguing that elements of them are no longer ‘tenable’ and need a redesign” “European regulator questions value of stress tests” November 16.

I could not agree more for two reasons:

First: Stress tests introduce a systemic risk. The fact that banker know their banks will be the object of stress tests causes them to distract their attention from what they might think to be more dangerous, in order to concentrate more on what they think regulators might think more dangerous.

Second: The stress tests are useless since they avoid stress testing many real stresses. In 2003 the United States General Accounting Office (GAO), in its study of the IMF’s capacity to predict crisis concluded, among other things, that of 134 recessions occurring between 1991 and 2001, IMF was able to forecast correctly only 11 percent of them. Moreover, when using their Early Warning Systems Models (EWS), in 80 percent of the cases where a crisis over the next 24 months was predicted by IMF no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.

Much of that has to be a consequence of that if IMF forecasts a crisis; it could quite possibly be blamed for detonating that crisis. Similarly, regulators will avoid to stress test the risks they might be blamed for having produced. For instance when will they stress test the banks on the possibility that their risk weight of 0% to sovereign would have to be increased, and the market reactions to that news. Never! They have painted themselves into a corner.

Sir, when it comes to banks, and their regulations, worry much more about what might be perceived as safe than about what is perceived as risky. In that respect, if I were to perform stress tests on banks, I would look to stress test the risks that seemingly would least need to be stress tested.


Brexit is sure a bad idea, but how can you be sure Remain is not even a worse one?

Sir, Alex Barker and Jim Brunsden quote Catherine Barnard, a professor of EU law at Cambridge university: “Never before has a treaty been constructed of this kind,” “The EU is a unique organization. What the Brexit process has revealed is just how deep the integration is in reality.” “Accord leaves Britain bound to Brussels” November 16.

On the first, indeed, to for instance adopt a Euro in order to push forward a union instead of letting a union produce a common currency, is a truly strange way to construct a union.

But, on the second “how deep the integration is in reality” I beg to differ. Having a member like Greece walk the plank, especially as EU authorities were most to blame for its problems, is not the doings of a real deep union.

Sir, let me refer to a speech delivered by Mario Draghi, President of the ECB, at the Frankfurt European Banking Congress, given today, “The outlook for the euro area economy”. 

It concluded with: “I want to emphasize how completing Economic and Monetary Union has become more urgent over time not less urgent – and not only for the economic reasoning that has always underpinned my remarks, but also to preserve our European construction.”

I agree, because as is, Italy will not walk the plank as Greece did, and that could bring on the end of the euro, as we now know it, which could bring an end to the European Union, as we know now it, or, clearer yet, as we perhaps really don’t know it.

Sir, whether Brexit or Remain supporters, does not Britain (and all other UE members) have the right to know what “completing Economic and Monetary Union” to “preserve EU our European construction”, which Draghi urges really entails?

Draghi also mentioned “as urgent as the first steps were in euro area crisis management seven years ago”, “The completion of the banking union in all its dimensions, including risk reduction, and the start of the capital markets union through implementing all ongoing initiatives by 2019”

Sir, does not Britain, a nation where banking means so much, have the right to know exactly what that entails so that it banks are not castrated in the process?It is not just me a foreigner asking. Let me remind you that seven years ago, Alex Barker in [Mr. Brexit Negotiator] “Barnier vs. the Brits” wrote about the fears of Sir Mervin King that Brussels reforms would reshape a vital British industry, banking, to the benefit of eurozone rivals.

Draghi also said: “Household net worth remains at solid levels on the back of rising house prices and is adding to continued consumption growth.” 

That is an untrue statement. A much truer one would be: “Household net worth remains very fragile since it rides almost exclusively on rising house prices, as a consequence of the distortion produced by too much and too favorable financing being offered for the purchase of houses. A distortion that helped to anticipate much of the consumption we have seen, but that will come back and hurt house owners, whether by house prices falling, or hurt everyone, by inflation eroding our real consumption power.

Sir, when that happens, and the crisis needs to be managed so as to impede the destruction of all social cohesion, would you prefer to do that on a national level, instead of on the level of a union in which very few know how to sing its anthem?

Sir, I’m no one to give a recommendation but, should not the Brexit vs. Remain discussions refer more fundamentally to the future of Britain and of EU, instead of being turned into another profitable venture for some opportunistic polarization profiteers?

Should not FT inform its readers, in a much more balanced way, of all challenges that lay ahead, not only those of a Brexit but also those of a Remain?

A long time friend and admirer of Britain 


November 14, 2018

The risk weighted capital requirements for banks, is the most potent steroid ever for having to suffer some truly bad “Minsky moments”.

Sir, John Plender correctly writes: “If Hyman Minsky were alive today, he would regard the current economic cycle as a testing ground for his instability hypothesis. That which holds the financial system has an innate tendency to swing from robustness to fragility because periods of financial stability breed complacency and encourage excessive risk-taking.” “Complacent investors face a Minsky moment as pendulum swings” November 14.

But what Plender does not mention, perhaps because it belongs to that which shall not be mentioned, is the greatest procyclical pro-Minsky-moment steroid ever, namely the risk weighted capital requirements for banks.

When times are good and credit rating outlooks are sunny, that regulation allows banks to leverage immensely with what’s perceived as safe but, when a hard rain seems its going to fall, and credit ratings fall, all recessionary implications are made so much worse by banks then, suddenly, having to hold much more capital… and since such capital might be hard to find during bad times, they take refuge in whatever is still perceived, or decreed as in the case of sovereigns, to be of less risk… just increasing the stakes

Plender writes: “It is historically atypical in that central banks have been encouraging deflationary threat”. Really? At least with respect to banks they have encouraged these to build up ever-larger exposures to what’s perceived as safe, like residential mortgages, or to what’s decreed as safe, like loans to friendly sovereigns. 


November 13, 2018

Should not EU cut its grand bargain with all its over-indebted sovereigns before any Brexit vs. Remain voting took place?

David Folkerts-Landau, the chief economist at Deutsche Bank writes, “An Italian debt crisis poses an existential risk to the eurozone. The current game of chicken is irresponsible. It also ignores the dangers inherent in any financial crisis, the costs of which would dwarf those of having the ESM step in”, “Europe must cut a grand bargain with Italy” November13.

Of course Italy cannot be expected to pay €2.450 billion, meaning over €40.000 per citizen, denominated in a currency that is de facto not Italy’s real domestic (printable) currency. Be sure Sir, Italy will not walk the plank, as Greece had to do.

But of course what Folkerts-Landau writes, “The option of a debt write-down with private sector involvement is also unfeasible”, is not possible either.

One way to solve Italy’s (and Europe’s) sovereign debt crisis as painless as possible could be by using a Brady bond/zero coupon mechanism as used creatively by the US in 1989 during the Latin American debt crisis. I mentioned the use of those bonds to FT in a letter of 2008, “"Après us, le déluge", as did William R. Rhodes in 2012 with “Time to end the Eurozone's ad hoc fixes”.

A complementary tool to help fix Italy’s (Europe’s) banks, as I wrote to FT in 2012, would be to do what Chile did during its mega bank crisis in 1982 namely: a. having central banks issue bonds in order to buy “risky” loans not allowing banks to pay dividends until those notes had been repurchased; b. forcing banks to hold more capital with central banks subscribing shares not wanted by the market with these shares resold over a determined number of years and c. generous financing plans to allow small investors to purchase equity of the banks.

Obviously, for Italy’s (and Europe’s) banks to be really helpful to the real Italian economy, it would be imperative to get rid of the credit risk weighted equity requirements for banks, those which erode the incentives for banks to give credit to those who most could do good by receiving it, like SMEs and entrepreneurs.

What is absolutely true though is that to solve Italy’s (Europe’s) problems, more zero risk weighted loans to the sovereigns, in order for government bureaucrats to allocate the resources derived from bank credit, will just not cut it… no matter how much haircut on Italy’s (or other European sovereign’s) debt you accept.

Europe would need to start the process of helping Italy (and Europe) by getting rid of all current high-shot regulators. Not only would they be too busy, as until now, covering up their mistakes, but also, as Einstein said, “We can't solve problems by using the same kind of thinking we used when we createdthem.”

Sir, I suspect all in FT would vote for a Remain if given a chance, but before doing so, would you not prefer EU authorities to clearly explain to you how they intend to fix the European sovereign debts overhang. That which if not fixed will crash the Euro and thereby most probably also crash the European Union? Sir, would it not look truly silly Remaining in something gone?

PS. It is clear that without the help of those wanting immensely more to save the European Union than to save some cushy jobs, the future of the EU very sadly looks very bleak.


November 12, 2018

Aren’t all nations, one way or another, tarred with a similar brush of nationalism?

Sir, Harriet Agnew and David Keohane report that, on the centenary of the end of the First World War, Emmanuel Macron railed against nationalism as a “betrayal of patriotism”, in an implicit rebuke to his US counterpart. “Macron attacks nationalism in Armistice Day rebuke to Trump” November 12.

Macron said: “By saying ‘Our interests first. Who cares about the others?’ we erase what a nation holds dearest, what gives it life, what makes it great, and what is essential: its moral values.” Is that not beautiful? Of course it is!

My problem though is that precisely these days I have been writing that the ending of the First World War, and the Versailles treaty, should provide an opportunity to reflect on the armistice conditions that are imposed on sovereigns, when they have to capitulate because of excessive loads of public debts. This especially because it is usually not only the defeated sovereign’s fault. 

If we look behind most odious debts, we will find surely find odious credits. In the case of eurozone sovereigns, like Greece, odiously dumb regulations too. Assigning a zero risk, as the European Commission did to a nation that is much indebted in a currency like the euro, which is not really its domestic (printable) currency, made absolutely no sense. That meant for instance that German and French banks could lend to Greece against no capital at all, and so, naturally, these banks could not resist the temptation of offering Greece too much credit, and Greece could not resist the temptation of taking on too much debt.

But what happened? The recent armistice conditions imposed by EU authorities required Greece to take on debt, much of it in order to repay German and French banks, leaving it with about a €345 billion debt, more than €30.000 per each Greek, in a currency that as I mentioned is de facto not their own. 

Sir, so I ask is that not just another Carthaginian peace? Viewed this way, no matter how right what Macron preaches is, does he really have the right to throw the first stone on “moral values”? Aren’t all nations, one way or another, tarred with a similar brush of nationalism?

Sir, this is no minor issue. Since Italy would most probably not walk the plank like Greece, the future of the Euro, and of the European Union is at stake… and that is something that those who might rightly defend the Remain against the Brexit, should at least out of pure precaution consider.


November 10, 2018

Poor Italy! So squeezed between inept Brussels’ technocrats and their own redistribution profiteers.

Sir, I read Miles Johnson’s and Davide Ghiglione’s  “Italy’s welfare gamble angers Brussels and worries business” November 10, and I cannot but think “Poor Italy”, squeezed between inept Brussels’ technocrats and redistribution profiteers.

“Italy’s welfare gamble”? That welfare which Brussels’ technocrats, for the purpose of bank capital requirements have with their Sovereign Debt Privileges of a 0% risk weight helped finance? Italy’s public debt is now about €2.450 billion, meaning over €40.000 per citizen? 

That 0% risk weight is alive and kicking even though Moody’s recently downgraded Italy's debt to “Baa3”, one notch above junk status and that even though it might not have yet considered that the euro is de facto not a real domestic (printable) currency for Italy. If that is not a welfare gamble by statist regulators on governments being able to deliver more than the private sector, what is? Poor Italy.

But then I read about a government proposal that could increase welfare payments to poor and unemployed Italians to as much as €780 a month but which eligibility and distribution criteria remain unclear and again I shiver. That sounds just as one more of those conditional plans redistribution profiteers love to invent in order to increase the value of their franchise. Poor Italy. 

For me a way out that would leave hope for the younger generation of Italians would have to include a restructuring of their public debt with a big haircut for their creditors; hand in hand with an unconditional universal basic income, that starts low, perhaps €100 a month, so as to have a chance to be fiscally sustainable.

And if that does not help, then Italy will have to count (again… as usual) on its inventive and forceful strictly citizen based “economia sommersa”, something that is not that bad an option either.

PS. Oops! I just forgot that most of that Italy debt is held by Italian banks, so perhaps a type of Brady bonds EU version could be used. Like Italy issuing €2.4 trillion in 40 years zero-coupon debt, getting an ECB guarantee for a substantial percentage of its face value, and allowing banks in Europe to hold these on book on face value; all so that Italy can use it to pay off its creditors could be a shooting from the hip alternative… and then of course have all pray for some inflation to reduce the value of that debt.

PS. I am not the one first speaking about Nicholas Brady, then US Treasury Secretary, approach in 1989. Here is William R. Rhodes “Time to end the eurozone’s ad hoc fixes” in FT November 2012.