January 31, 2018

If you want your sovereigns to have easier access to credit than your entrepreneurs, then you are not thinking on your grandchildren.

Sir, with respect to sovereign bond-backed securities you opine “bank regulation should be reformed to treat SBBS as favourably as national bonds in capital requirements — indeed, more favourably, since SBBS would make it less destabilising to have banks hold equity against concentrations of their own government’s bonds” “A rare chance to create a pan-eurozone safe asset” January 31.

What? Instead of a 0% risk weighting, these bonds collateralized with loans to sovereigns, should now have even a minus something risk weight percentage? So that banks can earn even higher expected returns on equity when lending to sovereigns? So that banks will lend even less to entrepreneurs. Sir, as a grandfather, let me tell you, that is a shameful proposition.

Defending the SBBS you argue: “the monetary union enjoys a well-deserved streak of growth”. Holy moly, what “well-deserved streak of growth” is that? Do you refer to that growth that has been financed by quantitative easing and by the low interest rates that makes it impossible for pension funds to live up to its offers? Come on! It is a totally undeserved growth… and one that will be very hard to repay.

You opine one should “create a truly pan-eurozone benchmark safe asset… the SBBS”

Sir, when you save, by investing in a bond, you should want the debtor invest your money well, so as to be able to repay you well. A eurozone SBBS seems here to be a bond designed so that no sovereign would have to repay it, and therefore no sovereign would be required to invest it well. Would you like your pension fund to invest in such SBBS with ultra low interest rates? 

And you also opine that “if issued in sufficient quantities, SBBS could help end the danger at the heart of the eurozone crisis: the “doom loop” between sovereign and bank debt. Banks holding senior SBBS would be safe from sovereign risk”

Sir, again, for the umpteenth time, that “doom loop” was created, in 1988, when regulators in their risk weighted capital requirements for bank assigned the sovereign a risk weight of 0% and the unrated citizens, those who form the backbone of any sovereign, a risk weight of 100%. And then I believe you said nothing about that!


January 29, 2018

On the issue of a Universal Basic Income everyone must take side. You are either with the citizens, or with the redistribution profiteers.

Sir, Richard Milne, with respect to the trial on Universal Basic income in Finland writes: “Ilkka Kaukoranta, chief economist of the SAK trade union confederation, is sceptical of the trial. Unions believe that taking away the conditionality of benefits — the requirement that their recipient has to look for work — would undermine the welfare system, leading to cuts. ‘A conditional safety net is the only way to combine a high level of benefits with a high level of employment,’ he says” “Finland puts ‘money for nothing’ policy to the test” January 29.

Let us be clear the “un-conditionality” of the Universal Basic Income threatens, directly, the franchise value of the redistribution profiteers. And, if this is not made clear, and they are immediately denounced at all time, we citizens do not stand a chance.

Is it going to be a world in which all of us are given some income that would make it easier for us to get out of bed and reach up to the new economy appearing, or is our only chance to survive to master the art of sucking up to the redistributors. 

In my saddened Venezuela, the current government offers, by means of food bags known as “CLAP”, much better chances of survival to those who bow their head and humiliate themselves by supporting it. Is that what you want? 


If you pick the wrong data stream, as bank regulators did, real tragedies can happen

Sir, Rana Foroohar writes: “The ability of a range of companies — in insurance, healthcare, retail and consumer goods — to personalise almost every kind of product and service based on data streams is not just a business model shift. It is a fundamental challenge to liberal democracy.” “Digital democracy is dangerous” January

Yesterday I received the following message from Amazon: “Based on your recent activity, we thought you might be interested in: The Complete Guide to Building with Rocks & Stone: Stonework Projects and Techniques”. Since, at least after the age of eight, I am absolutely sure I have never harbored any intention, much less a burning desire, to build with Rocks & Stone, I suppose that, in terms of using the correct data streams, they business are not really there yet. Neither are bank regulators, though that has much more serious consequences than me not clicking on that book.

Foroohar writes: “Illah Nourbakhsh, a professor at the Robotics Institute of Carnegie Mellon, [has] launched a project to educate elementary school children about the power of data, its risks and rewards, and how to use it to advocate for themselves.”

Great! I hope professor Nourbakhsh makes a case of explaining to the young that the regulators, when setting their current risk weighted capital requirements for banks, used the data about the riskiness of assets, and not the data about what risks those assets posed to the bank system. Had they picked the correct data stream, they would never ever have assigned a minimal risk-weight of 20% to what, perceived so safe as to be rated AAA, could be truly dangerous, and 150% to what, being perceived so risky so as to validate a below BB- rating, is totally innocous.

And then the professor could also, if he dares, explain to these youngsters that these perceived risk adverse regulations now have banks solely refinancing and extracting all value from the “safer” present economy; and not financing the “risky” future that they as young need to be financed, if they are going to have a reasonable future.


January 27, 2018

Good global economic governance also depends on the Financial Times of the world doing their duty by questioning diligently.

Sir, you write “The world economy is in good health. Global economic governance is not. The first remains acutely vulnerable to the second… Davos produced few ideas on compensating for US destructiveness” “The gaping hole in global economic governance” January 27.

No! The world economy is not in good health. Just look at all current world debt contracted to kick the 2007/08 crisis can forward, to finance current consumption and to inflate stock markets with excessive dividend payments and buy backs; and then compare it to how little of that debt has been used to finance future production.

And whatever US destructiveness you want to identify, it would pale when compared to the destructiveness caused by bank regulators with their risk weighted capital requirements for banks.

Sir, in a world were sleaziness abounds everywhere and for so many reasons, you find it more worthy of the Financial Times to launch a full-fledged investigation “without fear and without favor” of an all male-charity dinner; than daring for years to ask bank regulators some basic questions like:

Why do you want banks to hold more capital against what has been made innocous by being perceived as risky, than against what is dangerous because it is perceived as safe? Is that not setting us up for too big to manage crises?

What went through your mind (what did you smoke) of the Basel Committee allowing with Basel II banks to leverage a mindboggling 62.5 times their capital only because an AAA to AA rating issued by human fallible rating agencies was present?

Is being a safe mattress under which to stash away our savings a more important objective for our banks than allocating credit efficiently to the real economy? “A ship in harbor is safe, but that is not what ships are for.” John A Shedd

Why should you, as a regulator, want with lower capital requirements favor bank credit to what’s already favored by being perceived as safe, and thereby cutoff more the credit to what is already disfavored by being perceived as risky?

Why did you assign a 0% risk weight to sovereigns? Is that not runaway statism? If it is because sovereigns can always print money to pay back their loans, don’t you know that is precisely one of the real and worst risks with sovereigns?

As is, don’t you know you are dooming our economies to subprime performance and our banks to end up gasping for oxygen in some overpopulated safe-havens?

And that’s just for starters:

FT is as much at fault as anyone for the absurdness of current global governance of banks. Sir, this could also be referred to as sleazy journalism.


January 26, 2018

Martin Wolf, public borrowings are being subsidized by bank regulations

Sir, Martin Wolf discussing the UK government’s private finance initiative (PFI) and costs of capital writes: “A sophisticated counter-argument is that government borrowing enjoys an implicit subsidy from taxpayers. That represents an unpriced insurance contract… This subsidy makes government funding look cheaper. But this is an illusion. “Public-private partnerships have to change to be effective” January 26.

Illusion? Does Martin Wolf really think that if banks had to hold the same capital against sovereign debt, than for instance against loans to entrepreneurs, the interest rate on public debt would remain the same?

Or, in a similar vein, does Martin Wolf really think that if banks had to hold the same capital when financing houses, than for instance when lending to entrepreneurs, the price of houses would not be negatively affected?

Mr. Wolf: Do you really think it is the risks for the banking system that are being weighted in those capital requirements? If so, I am sorry to have to break the bad news to you, again, for the umpteenth time. The risks that are being weighted for are the risks of the assets per se, which is why regulator want banks to hold more capital against what is ex ante perceived as risky than against what is perceived as safe.

Which explains how they could assign a risk weight of only 20%, to what rated AAA could pose a terrible threat to our banks, and a whopping 150%, to what rated below BB- bankers won’t touch with a ten feet pole.

John Kenneth Galbraith, in his “Money: Whence it came, where it went” (1975) wrote: “What people do not understand, they generally think important. This adds to the prestige and pleasure of the participants” … and yes, Sir, “risk weighted capital requirements” sounds indeed so delightfully sophisticated… almost as much as “derivatives”.


January 19, 2018

Will Davos 2018, again ignore the financial weapon of mass destruction concocted by the Basel Committee populists?

Sir, Gillian Tett when commenting the concerns that will be expressed at the 2018 Davos meetings writes “The biggest perceived danger of 2018, in terms of impact, is that somebody uses weapons of mass destruction”, Holy moly! and ends with: “keep a close eye on what Davos is not worrying about enough this year: that pesky matter of global finance, particularly in places such as China.” “Populist swing alarms financial titans” January 19.

My concern though is that the technocratic and hubristic populism, proclaimed by the Basel Committee will again not be denounced in Davos, perhaps because doing so might be deemed ungentlemanly or ungentlewomanly behavior in such fine surroundings.

I refer of course to their promise that distorting bank credit with risk weighted capital requirements for banks will make our banks safer.

Higher capital requirements for what’s “risky”, has caused among other that millions of entrepreneurs, those on which so much of our economic future depends, have seen their credit applications rejected or not even received by banks.

Lower capital requirements for what’s “safe”, has among other, helped to fuel house prices which has overloaded that sector with mortgages that, within a future subprime economy, seem impossible to service.

And let’s not even talk about what the 0% risk weight awarded to sovereigns has done in terms of statism and of blurring the risk free rates.

Sir, no doubt about it, the risk weighted capital requirements for banks, is a weapon of financial mass destruction.

Did we not see it explode with AAA rated securities that banks were allowed to leverage 62.5 times with?

Did we not see it explode in Greece with sovereign debt that European regulators allowed their banks to hold against no capital at all?

If a regulator is incapable to provide a clear answer to: “Why do you want banks to hold more capital against what has been made innocous by being perceived as risky, than against what is dangerous because it is perceived as safe?” should he not be fired Sir?


PS. On the same page Philip Stephens writes:” The World Economic Forum and the Davos crowd pride themselves on their globalism has set itself the fearsome task of mapping “a shared future in a fractured world”. “Trump, Davos and the special relationship”. The risk weighted capital requirements, which favor refinancing of the “safer” present over financing the “riskier” future, is fracturing the world and causing the future to produce less and less of what could be shared.


January 18, 2018

Why do FT reporters refuse to implicate regulators and their risk weighted capital requirements for banks in the 2007-08 crisis?

Sir, Patrick Jenkins writes: “As a correspondent in Frankfurt in the early 2000s, I saw first-hand how a sector that had grown fat on government-supported AAA credit ratings, turned hubristic. The situation was at its worst — and most dangerous — after the EU pressured Berlin to end the government guarantee regime in 2005. That ruling prompted the banks to raise three years’ worth of money in the bond markets within a matter of months. It gave them vast investment resources to deploy just at the time when Wall Street and the City of London were aggressively pushing complex collateralised debt obligations underpinned by sub-prime mortgages and other nominally safe, but ultimately toxic, products to anyone that would buy them”, “The role of dumb money in Carillion’s crash”, January 18.

Amazing! Jenkins does not mention the fact that in June 2004, with Basel II, the Basel Committee approved a risk weight of only 20% for all private sector debt rated AAA to AA. That, with a basic capital requirement of 8%, meant banks needed to hold only 1.6% in capital against what was so rated; which meant the banks could leverage a mind-blowing 62.5 times with such assets.

It was pure regulatory lunacy! And the same loony regulators are still at it. How FT’s journalists and experts can keep so mum on the role of dumb and irresponsible regulations escapes me.

Jenkins refers to “complex collateralised debt obligations underpinned by sub-prime mortgages and other nominally safe” What a BS. These were AAA rated securities, that was what the market and bankers saw.

In January 2003 the Financial Times published a letter I wrote and that ended with: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”

PS. FT, Jenkins, do yourself a favor. Go to all banks that had any involvement with Carillion and carefully research how much capital they held against exposures to it, before the blow-up. And ask to have a look at their equity requirements’ minimizing sophisticated risk-models, or at any “superficial credit analysis” … and don’t just naively believe anything they tell you.


January 17, 2018

The risk weighted capital requirements for banks close way too many development doors.

Sir, Martin Wolf referring to the World Bank’s latest Global Economic Prospects writes: “A slowdown in the potential rate of growth is affecting many developing countries. This is not only the result of demographic change, but also of a weakening in productivity growth. They need to tackle this urgently.” “Recovery is a chance for the emerging world” January 17.

Sir, during my two years as an Executive Director of the World Bank, and with respect to the Basel Committees’ bank regulations, I continuously argued for the need to maintain “an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth.”

At the High level Dialogue on Financing for developing I presented a document titled “Are Basel bank regulations good for development?” which I answered with a clear NO!

In 2009 Martin Wolf, in his Economic Forum allowed me to publish “Free us from the imprudent risk aversion and give us some prudent risk-taking”.

And in hundreds sites more, among other with over 2600 letters to FT, I have argued about the horrible mistakes of the risk weighted capital requirements for banks present, not just for developing countries but also for developed ones.

The distortion these produce in the allocation of bank credit in favor or what is perceived or decreed as safe, sovereigns, AAA rated and mortgages, has impeded millions of “risky” entrepreneurs around the world to gain access to bank credit, thereby hindering much new productivity.

And those regulations will not bring us stability, much the contrary.

So the first thing to do to allow what Wolf wants, “greater entrepreneurial effort, more competition, higher investment and faster improvements in productivity”, is the elimination of risk weighted capital requirements for banks.” But Martin Wolf will most probably not agree, because how could he?

Sir, and as I have told you umpteenth times those regulations will not bring us stability, much the contrary.

PS. Look for instance at houses. What would the price of a house be if there was no financing available to purchase these? Of the current price of houses how much is represented by the intrinsic value of the house, and how much is a reflection of all one-way-or-another subsidized financing allocated to that sector? The sad truth is that our society has ended up financing the financing of houses. When all that low risk weighted mortgaging comes home to roost in a subprime unproductive economy, it will be hellish.


January 13, 2018

Parent regulators, not even aware they were the ones blowing the bubbles, shamelessly put all the blame on their toddler banks when these burst.

Sir, Tim Harford writes: “As any toddler can attest, it is not an easy thing to catch a bubble before it bursts” “Forever blowing bubblemania” January 13.

That is entirely true. But though we should not expect our toddlers to know it, parents are fully aware that the bubbles their dearest are chasing, were blown up by them, in the clear expectation that these would burst, or delightfully disappear in the skies.

Harford concludes in that “It’s very easy to scoff at past bubbles; it is not so easy to know how to react when one may — or may not — be surrounded by one”

Not entirely true, because that should not excuse the case of parents not even being aware they’re blowing bubbles.

In the western world, regulators, for instance, by allowing banks to leverage their equity so much when financing residential houses, are, no doubt about it, blowing up a house credit bubble that will surely blow up in our face… even though we cannot exactly know when that will happen.

When with Basel II in 2004 regulators allowed banks to leverage a mindboggling 62.5 times their capital, only because an AAA to AA rating was present, it should have been clear to them that they were blowing a bubble. Seemingly they did not. Worse, when then the AAA rated securities backed with subprime mortgages exploded in their face, they should have been able to put two and two together, but no, they put all the blame on the banks, the toddlers in this case. Even to the extent of describing the excessive bank exposures to AAA rated assets, or to sovereigns like Greece who with a 0% risk weight they had decreed infallible, as an irresponsible excessive risk-taking by bankers. They should be ashamed!

PS. Like Harford’s senior colleague I was also very skeptical about Amazon’s valuation. In April 1999 I wrote in an Op-Ed that Amazon had “joined the rank and files of ‘tulipomanias’” Yes, I admit, it is now worth much more than it ever was at that time. That said, and though Amazon is now way more than about books, I still suspect that, long term, because of: “‘shopping agents’ will permit clients to quickly compare one company’s prices to those of its competition, which would seem to presage an eventual fierce price wars, would create an environment that is not exactly the breeding ground for profits that back the market valuations we are now observing”.

But then I also assumed institutional “efforts aimed at prohibiting any monopolistic controls of the Web”, and in this perhaps I could have been way to naïve.


January 12, 2018

How would I privatize a public service? Always making sure that who owns and manages it, are neighbors I can hold accountable.

Sir, I refer to Martin Wolf’s discussion on the subject of privatized or not public services. “Nationalisation is the wrong answer to a real question” December 12.

I was a very active participant, wearing many different hats, in many of the privatizations that took place in my Venezuela, during its privatization influenza.

Like Wolf I much favour the private over the public sector managing these services but, looking back, the number one requirement I would make when privatizing, would be to require the private owners of any such privatized public services, to live within the community, and have their affiliation to the public service transparently identified all the time. Like being able to call over the fence: “Hey Bill, what happened last night when the lights went out”, “Hey Bill, can’t you find a way to stop it from being so expensive?”

I felt in the air the immediate difference between a private electrical services company held by a family living in Caracas, who wanted to make profits but also to be seen as good public servants, and that same company when it passed into the hands of absentee owners.

It was day and night! The new investors loaded up the old conservative run company with debt, took most of their skin out of the game paying themselves huge dividends and other services, and left the poor users having to serve that debt.

Of course, then came Hugo Chávez and put it all in the hands of the government, and so it went from a bit bad to plain horrible.


January 10, 2018

The financial-elite’s reluctance to ask bank regulators for clear explanations, seriously threatens the west’s liberal democracy and global order

Sir, Martin Wolf asks and answers: “What has created sharp (and usually unexpected) slowdowns? The answers have been financial crises, inflation shocks and wars” “The world economy hums as politics sour” January 10.

Indeed, but currently our economies are also suffering a slow but steady state slowdown as a consequence of the insane risk weighted capital requirements for banks, which were created in the name of making banks more stable. It all boils down to the following:

If a “safe” AAA rated offered a correct risk adjusted net interest margin to a bank, a loan to it could, according to the Basel Committee’s Basel II of 2002, be leveraged 62.5 times but, if that correct risk adjusted net interest margin was offered by a “risky” unrated entrepreneur or an SME, then a loan to these could only be leveraged 12.5 times.

As a direct result bank credit has been used to finance “safer” present consumption; to inflate values of mostly existing assets; and way too little to finance “riskier” future production.

In summary it amounts to having placed a reverse mortgage on our past and present economy, in order to extract all of its value now, not caring one iota about tomorrow, and much less about that holy social intergenerational contract Edmund Burke spoke about.

But Wolf could argue that this is evidently not true because: “Yet the world economy is humming, at least by the standards of the past decade. According to consensus forecasts, optimism about prospects for this year’s growth has improved substantially for the US, eurozone, Japan and Russia”

Sir, it’s all a debt financed economic growth. Like a family having a great Christmas by racking up debt on their credit cards. How much of the enormous recent growth of debt everywhere has gone to finance future builders like entrepreneurs and SMEs? The answer is surely a totally insignificant fraction.

Wolf here anew identifies threats: “The election of Donald Trump, a bellicose nationalist with limited commitment to the norms of liberal democracy, threatens to shatter the coherence of the west. Authoritarianism is resurgent and confidence in democratic institutions in decline almost everywhere.”

Sir, sincerely, what is all that compared to the fact that the world’s financial elites, either because it is not in their interests, or because lacking self confidence they are afraid they might have overlooked something, do not have the gut to firmly ask regulators: “Why do you want banks to hold more capital against what has been made innocous by being perceived risky, than against what is dangerous because it is perceived safe?”, and not accepting any flimsy nonsensical answer veiled in sophisticated voodoo technicalities.

Martin Wolf has moderated numerous important conferences on financial regulations, but not one has he dared to ask that simple question. Could it just be because he is scared he would then not be invited again as a moderator? Or is it that he just doesn’t get it.

And Sir, you have really not been living up to your motto either. Shame on you!

PS. And all that risk adverse regulations for nothing, since, as I have told Wolf and FT time after time, major bank crisis, like that of 2007/08, never ever result from excessive exposures to what is ex ante perceived as risky.


January 09, 2018

If AI was allowed to have a crack at the weights used by current risk weighted capital requirements for banks, the regulators would surely have a lot of explaining to do.

Sir, John Thornhill writes that he saw an artificial intelligence program crack in 12 minutes and 50 seconds the mindbendingly complex Enigma code used by the Germans during the second world war” “Competent computers still cannot comprehend” January 9.

I wish AI would also be asked to suggest some weights for the risk weighted capital requirements for banks.

For instance in Basel II the standardized risk weight assigned to something rated AAA, and therefore perceived as very safe, something to which banks could build up dangerous exposures, is 20%; while the risk weight for something rated below BB-, and therefore perceived to be very risky, and therefore banker won’t touch it with a ten feet pole, is 150%.

I would love to see for instance Mario Draghi’s, Mark Carney’s, and Stefan Ingves’ faces, if artificial intelligence, smilingly, came up with weights indicating a quite inverse relation between perceived risks and real dangers to a banking system.


January 08, 2018

The worst problem with the dangerously growing debt is what it has not financed

Sir, Pascal Blanque and Amin Rajan write: “for central banks, global debt is like the sword of Damocles — an ever-present danger. It stands at about 330 per cent of annual economic output, up from 225 per cent in 2008… No one knows all the cracks into which excess liquidity has seeped — or what risks are being stored up”, “Beware the butterfly: global economies are on borrowed time” January 7.

Sir, if central bankers are only now waking up to this fact, then you must agree with that we are in much bigger problems that we thought.

Central bankers, lacking in character and not wanting to live up to their own responsibilities, dared not do anything but to push the 2007/08 crisis cart down the road, with their QEs and low interest rates. For someone who argued back in 2006 the benefits of a hard landing, that is bad enough.

But it’s so much worse than that. Blanque and Rajan argue that “Debt means consumption brought forward while low rates mean the survival of zombie borrowers and companies… High debt is not intrinsically bad so long as it is used to fund investments that deliver profits or create financial assets worth more than the debt. Data on this score are hard to come by.”

And there lies the fundamental problem. Because of risk weighted capital requirements for banks, bank credit has been used to finance “safer” present consumption; to inflate values of mostly existing assets; and way too little to finance “riskier” future production. It amounts to having placed a reverse mortgage on our past and present economy, in order to extract all of its value now, not caring one iota about tomorrow, and much less about that holy social intergenerational contract Edmund Burke spoke about.

It is clear the experts Blanque and Rajan have yet not understood what happened as they write: “The origins of the current worries predate the 2008 crisis which was caused when lending standards went from responsible to reckless: the siphoning of money into dodgy ventures such as subprime mortgages, covenant-light loans or sovereign lending based on creative accounting.”

The truth is that without truly reckless regulatory standards, those which allowed banks to leverage over 62.5 time to 1 with securities rated by human fallible rating agencies AAA; and, at least in Europe, allowing banks to lend to a 0% risk weighted sovereign like Greece against no capital at all, nothing of the above would have happened.

What to do? In my mind, in order to extricate the world of this problem, we need first to rid us completely of the credit distorting risk weighted capital requirements; and second, to be able to manage the transition to for instance a 10% capital requirements against all assets, including sovereigns, without freezing the whole credit machinery, perhaps bank creditors would have to accept, in partial payment of their credits, negotiable non redeemable common fully voting shares issued by the banks. If that helps to bring back undistorted bank vitality, it might be the best shares to have ever.

PS. Blanque and Rajan reference “S&P 500 corporates… stashing cash reserves outside the US.” What cash? Treasurers have not stacked away cash under corporate mattresses. Those surpluses are all already invested in assets, of all sorts, and which could suffer losses just like any other assets.


January 06, 2018

What if workplace distractions were considered part of consumption instead of part production?

Sir, Tim Harford, who has blocked me on Twitter writes: “Bank of England’s unofficial blog…compared plunging productivity with the soaring shipments of smartphones. Typical productivity growth in advanced economies had hovered steadily around 1 per cent a year for several decades, but has on average been negative since 2007. That was the year the iPhone started to ship.” “Computers are making generalists of us all”, December 6.

That iPhone and many of its close or distant cousins, cause a lot of distractions. If that time distracted was classified not as time of production but as time of consumption, and outputs remain fairly the same, would that not point at much higher productivity and much higher real salaries?


PS. Harford writes here also a lot about Power Point presentations. Here my long ago take on it


January 05, 2018

It’s not the role of regulators and central banks to help governments fund their operations, behind the back of citizens

Sir, Kate Allen writes that “euro-area financial institutions” have reduced their holdings of public debt “17 per cent in the past two years [but] the ECB made nearly €1.5tn of cumulative net purchases of eurozone public sector bonds through its quantitative easing programme — effectively replacing the purchasing role that banks had played. “Post-crisis reforms force European governments to curtail size of debt sales” January 5.

It all forms part of the same statist subsidizing of public debt. 

What would sovereign rates be if banks had to hold the same capital against sovereign debt than against loans to citizens; and if ECB had not purchased “eurozone public sector bonds through its quantitative easing programme”? The answer would have to be rates much higher, which would send quite different risk-free-rate signals.

In 1988, with Basel Accord, statist regulators, with their 0% risk weighted bank capital requirements, began subsidizing immensely government borrowings. When the 2007/08 crisis came along, central banks, perhaps in order to hide own their regulatory failures, with their quantitative easing purchases generated, wittingly or not, new sovereign debt subsidies.

This has dramatically changed the economical relations between governments and private sectors. It amounts to statist hanky-panky behind the backs of citizens. Since besides needing servicing it consumes, for nothing really special, sovereign indebtedness space that could be urgently needed tomorrow, it might become deemed as high treason by future generations. Where this is going to end is anyone’s guess, but it sure won’t be pretty.


January 04, 2018

Philip Augar, the ‘banking crisis of 2008’ did not dent at all Milton Friedman’s ideas that “sowed the seed of shareholder value”

Sir, Philip Augar quotes Milton Friedman with: “that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends . . . They are — or would be if they or anyone else took them seriously — preaching pure and unadulterated socialism….” “to make as much money as possible” for the owners, “while conforming to the basic rules of society”, “A call for boards to overturn the status quo” January 4.

And he follows up with “This sowed the seed of shareholder value... It took the banking crisis of 2008 and the ripple effect of financial disaster to expose the flaws of the theory”

What is Augar talking about? Banks, in order to make the highest risk adjusted profits, just followed the “basic rules of society”, in this case set by their regulators who, with their risk weighted capital requirements for banks told them: “Go out and make your biggest risk adjusted profits on what is perceived or decreed as safe”

And that is precisely what banks did, initially making huge profits, but also creating dangerously excessive exposures to “the safe” like AAA rated securities and loans to sovereigns who had been assigned a 0% risk weight, like Greece; which exploded.

I cannot understand how Augar can argue that has dented Milton Friedman’s thesis. If anything it clearly demonstrates the dangers of having some very few define and impose “the basic rules of society”.

He opines “boards need to develop a mindset that challenges rather than seeks to justify the status quo” That is correct, but does that not include papers like the Financial Times too?

Sir, why has FT not dared to challenge the status quo by for instance demanding regulators to give a straight simple answer, not disguised in incomprehensible technicalities, to the question of “Why do you want banks to hold more capital against what has been made innocous by being perceived risky, than against what is dangerous because it is perceived safe”?


If you really want banks to make green investments, allow bank to hold less capital against these than for instance against residential mortgages.

Sir, Suleika Reiners, Senior Policy Officer for Financial Reform, Institute for Financial Services, Germany writes: “banks need more equity, not less, in order to fulfil their key responsibility — namely to cushion risk, including for green investment. Lending for long-term endeavours such as large-scale renewable energy projects particularly deserves high-risk weightings” “Banks need more equity to boost green investment”, January 4.

Boy, has she got it all upside down. I have nothing against higher capital requirements for banks, unless these are imposed so irresponsibly so that the while bank credit machinery freezes. But, in order for banks to really boost green investment, they should be allowed to hold less capital against these investments than against other assets, so that they can earn a higher risk adjusted return on it.

Just look at how much they are financing residential housing, only because that’s perceived safe by regulator safe, and who therefore allow banks to hold little capital against the mortgages.

Reitners refers to “a study by the University of Cambridge in association with the United Nations Environment Programme Finance Initiative [that] has proved that stricter equity requirements are an insignificant factor in influencing the bank’s pricing of the loan or its willingness to lend.”

I have not read that study but, if those are the results, I am sure it contains major design flaws.

Sir, you refusal to discuss the distortions produced by risk weighted capital requirements, perhaps so as not to disfavour your bank friends, is partly to blame for the continuation of misconceptions as those expressed here by Suleika Reiners.

I don’t like the idea of distorting the allocation of bank credit to the real economy but, if we have to do it, let that at least be in pursuit of higher objectives than a simple risk avoidance, which will anyhow not isolate us from bank crises.


January 03, 2018

In terms of causing the undoing of the west’s liberal democracy and global order, Trump (until now) is nothing compared to the Basel Committee

Sir, Martin Wolf holds that: “political developments have fractured the west as an ideologically coherent entity” “Global disorder and the fate of the west”, January 3.

I argue that much more than recent political developments the west, as we knew it, at least as I thought of it, was fractured in 1988 when regulators, with the Basel Accord, came up with risk weighted capital requirements for banks.

The following were Basel II’s capital requirements for banks on exposures to sovereigns according to their credit ratings: AAA to AA = 0%; A+ to A = 1.6%; BBB+ to BBB- = 4%; BB+ to B- = 8%; Below B- = 12%; Unrated = 8%.

What have that regulation to do with “A liberal democracy [where] the participants recognise the legitimacy of other participants common…[and] rests on a neutral rule of law”?

That someone like Walter Wriston could argue, "Countries don't go bankrupt," does not mean that some sovereigns have the right to declare themselves infallible. That was never part of any (recent) global order… nor was that those citizens who perceived as safe were already so more favored than those perceived as risky when accessing bank credit, would gain additional advantages by generating lower capital requirements for banks.

The development of the west like all development does required a lot of risk-taking. The day regulators layered on their purposeless risk aversion on top of already risk adverse banks… they doomed the west to a standstill, a “relative decline”, which, with time, will turn into a fall unless we can stop that dangerous nonsense. God make us daring!

Sir, what Trump, until now at least, might be doing to cause the undoing of the west’s global order is chicken shit when compared to what the Basel Committee has done. Martin Wolf does not think so because he considers it the duty of bankers to do what is right and ignore the incentives they are given to provide a high risk-adjusted return on equity to their shareholders.

And talking about populism, is not “We have risk weighted the banks’ capital for you so that you can now sleep calm” pure outrageous technocratic populism?


January 02, 2018

The windows for poverty reduction will shrink dramatically, as robots and automation help bring back to developed countries the jobs lost to poorer ones.

Sir, Ben Bland writes: “Automation in Bangladesh may not make sense because you still have to ship but, if you make in the US, it makes more sense because there’s no [import] duty, no shipping, you’re closer to the customer and there are shorter lead times,” said Mr Rajan. “March of the robots stalls as clothes maker Crystal backs human workers” January 2.

What can I say? Should those robots working in the US share a moment of silence for those poor Bangladesh workers they will be substituting for?


$1m in capital for one New York City taxi medallion; only $16.000 for a bank to make a $1m loan to an AAA rated. Crazy!

Alistair Gray informs: “the value of the collateral, the medallions, has collapsed. New York City medallions were worth about $1m four years ago but some are now for sale for as little as $250,000” “Uber’s rise fuels financial crisis for taxi lenders” January 2.

$1m for “New York City licences, known as medallions, issued by the authorities to collect passengers”.

Sir, $1m for a New York City medallion, if that’s not a prime example of crony statism what is? Can there be any question of why Uber was needed? If you have to service a capital investment of this size, how high must the tariffs be and how much of these can be reasonably left to compensate the taxi drivers?

Compare this taxi driving capital requirement to that of banks according to Basel II. As payment for the benefit of regulators telling the world banks were regulated, and issuing various explicit or implicit deposit guarantees, banks needed to hold: 

1.6%, $16.000 in capital when lending $1.000.000 to an AAA rated client.

2.8%, $28.000 in capital when holding $1.000.000 in residential mortgages.

Max 8%, $80.000 in capital, for financing New York City medallions

PS. http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html


When bank regulators allowed banks to earn higher returns on equity by avoiding the “risky”, they violated a fundamental social contract

Sir, you write “Unemployment rates are low in the UK and US, but many of the new jobs are more precarious than the old ones they replaced… [so] the US and EU need to do more to encourage investment, and to deter anti-competitive behaviour and, as important, encourage competitive pressure on complacent incumbents.” “A better deal between business and society” January 2.

If one allowed banks to leverage more, and thereby obtain higher risk adjusted returns on equity when lending to what is perceived safe, than when lending to what is perceived risky, it would require ignorance, or total lack of concern, to believe banks will finance as much as usual small unrated companies and new entreprenuers.

But that is what regulators with their risk weighted capital requirements did and so it should be no surprise that “Despite low financing costs, private investment — the vital seed for long-term growth — remains insipid.” I am not talking about an “out-of-date regulatory models” that could be reformed, but about a fundamentally mistaken regulatory model.

You want “A better social contract… built on the idea of a humane, mutually beneficial interdependence between” employers and employees. Sir, who could argue against that? There’s always room for that.

But, how many times have I begged you to put the weight of the Financial Times behind asking the regulators: “Why do you want banks to hold more capital against what has been made innocous by being perceived risky, than against what is dangerous because it is perceived safe?”

But for some internal reasons of your own, perhaps even a petty one, you have refused to do so. In my book, just like when regulators regulated banks without caring about the purpose of these violated a social contract, you also violate your social responsibility as journalists by not intermediating opinions between your readers and those officially responsible for the decisions being questioned.