August 31, 2018

If you want to fight short-termism, you have a better chance doing so by appointing teenagers instead of workers to the boards.

Sir, Prof Louis Brennan welcomes Senator Elizabeth Warren’s Accountable Capitalism Act proposal that “requires companies with more than £1bn in annual revenues” that which would require the largest corporations to allow workers to choose 40 percent of their board seats … “a welcome counterforce to the inherent logic in shareholder value that necessarily results in short-term decision-making”, “Humans will do things for which they are rewarded”, August 31.

In that respect I don’t understand why workers would be lesser humans and not so only do things for which they are rewarded. If you want to have a better chance for adding some long term views why not appoint some savvy teenagers to the board. They are the ones who have to live the longest with their decisions, and they are who probably are by means of social media those most held accountable to their peers.

If Senator Warren is really serious about fighting short termism, and is not only engaging in some redistribution profiteering, then she should be up in arms against the regulators’ risk weighted capital requirements for banks. These subsidize the access to bank credit of the safer present, and impose tariffs on the riskier future.

@PerKurowski

September 2008 when the crisis bomb exploded is not as important as the dates when the bomb was planted

Sir, Philip Stephens writes: “The process set in train by the September 2008 collapse of Lehman Brothers has produced two big losers — liberal democracy and open international borders. Historians will look back on the crisis of 2008 as the moment the world’s most powerful nations surrendered international leadership, and globalisation went into reverse”. “Populism is the true legacy of the crisis”, August 31.

I agree with most of what Stephens writes, especially on how “central bankers and regulators, politicians and economists, have shrugged off responsibility” for the crisis. What I do take exception of is for the date of the collapse since much more important than when a bomb detonates, is when the bomb is planted. In this respect three dates come to mind. 

1988 when regulators announced: “With our risk weighted capital requirements for banks we will make our bank system much safer” and a hopeful world, who wanted to believe such things possible, naively fell for the Basel Committee’s populism.

April 28, 2004, when the SEC partially delegated their authority over US investment banks, like Lehman Brothers, to the Basel Committee. 

June 2004, when with Basel II, the regulators put their initially mostly in favor of the sovereign distortions on steroids, like for instance allowing banks to leverage a mind-blowing 62.5 times with assets that managed to acquire from human fallible credit rating agencies an AAA to AA rating. And EU authorities decided that all EU nations, like Greece should, in an expression of solidarity be awarded a 0% risk weight.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 


@PerKurowski

Special tax breaks for investment in O-zone is another source of distortion… and of gaming.

Sir, Gillian Tett writes that Steven Mnuchin the US Treasury secretary [told] luminaries such as Lloyd Blankfein, John Paulson, Howard Marks and Bill Ackman [to] put money into “development” projects in exchange for massive tax breaks.” “Populism is the true legacy of the crisis” August 31.

For a starter, given the presence of Goldman Sachs “luminaire” Lloyd Blankfein there I wish Mnuchin had also mentioned imposing special confiscatory taxes on any profits derived from financing regimes that notoriously violate human rights... namely giving odious credits.

As to tax breaks for investment in special opportunity zones O-zone, my objection would be the same like what I have against the risk weighted capital requirements for banks. It distorts the allocation of credit/investment to the real economy and it can be gamed.

@PerKurowski

Different bank capital requirements for different assets are worse than too little or too much bank capital.

Sir, Lex opines “Debates over bank capital resemble tennis rallies… On one side of the net you have the big global banks. They say they have plenty of capital and that forcing them to operate with more is a restraint on trade. Pow! On the other side are the regulators, who say more capital is better because you never know what losses you may have to absorb. Thwack!” "Bank capital: silly old buffer" August 31

But there are some few, like me, who argue that much worse than there being much or little capital, is that there are different capital requirements for banks, based on the perceived risk of assets. Riskier, more capital – safer, less capital. In tennis terms it would be like judges allowing those highest ranked to be able to play with the best tennis rackets, and the last ranked to play with ping-pong rackets. And of course that distorted the allocation of bank credit.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 


@PerKurowski

The US 2008 financial crisis was born April 28, 2004

Sir, Janan Ganesh writes: “A financial crisis that was experienced as a fragmented chain of events is being commemorated as just one: the fall of Lehman Brothers, 10 years ago next month",” “Political distemper preceded the financial crisis” August 30.

That is only because the truth shall not be named. In the case of the United States, that crisis started on April 28, 2004 when the SEC decided that the supervised investment bank holding company ("SIBHC"), like Lehman Brothers, “would be required periodically to provide the Commission with consolidated computations of allowable capital and risk allowances (or other capital assessment) consistent with the Basel Standards." 

When the Basel standards approved in June 2004 included allowing banks to leverage a mind-boggling 62.5 times with any asset that have been assigned by human fallible credit rating agencies an AAA to AA rating, or had been guaranteed by an AAA rated corporation like AIG, the crisis began its construction. That in the European Union the authorities also included allowing banks to lend to sovereigns like Greece against no capital at all would only worsen the explosion.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 


@PerKurowski

August 30, 2018

The US 2008 financial crisis was born April 28, 2004 – and different bank capital for different assets are worse than too little or too much bank capital.

Sir, I must refer to Janan Ganesh’s “Political distemper preceded the financial crisis” August 30, in order to make the following two comments:

1. “A financial crisis that was experienced as a fragmented chain of events is being commemorated as just one: the fall of Lehman Brothers, 10 years ago next month.”

That is only because the truth shall not be named. In the case of the United States, that crisis started on April 28, 2004 when the SEC decided that the supervised investment bank holding company ("SIBHC"), like Lehman Brothers, “would be required periodically to provide the Commission with consolidated computations of allowable capital and risk allowances (or other capital assessment) consistent with the Basel Standards." 

When the Basel standards approved in June 2004 included allowing banks to leverage a mind-boggling 62.5 times with any asset that have been assigned by human fallible credit rating agencies an AAA to AA rating, or had been guaranteed by an AAA rated corporation like AIG, the crisis began its construction. That in the European Union the authorities also included allowing banks to lend to sovereigns like Greece against no capital at all would only worsen the explosion.

Oops! The following part had nothing to do with Janan Ganesh, but all with Lex's "Bank capital: silly old buffer"

2. “Debates over bank capital resemble tennis rallies… On one side of the net you have the big global banks. They say they have plenty of capital and that forcing them to operate with more is a restraint on trade. Pow! On the other side are the regulators, who say more capital is better because you never know what losses you may have to absorb. Thwack!”

But there are some few, like me, who argue that much worse than there being much or little capital, is that there are different capital requirements for banks, based on the perceived risk of assets. Riskier, more capital – safer, less capital. In tennis terms it would be like judges allowing those highest ranked to be able to play with the best tennis rackets, and the last ranked to play with ping-pong rackets. And of course that distorted the allocation of bank credit.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 


@PerKurowski

EU needs to find a president of the European Central Bank quite different from Mario Draghi… whatever it takes

Sir, you opine, “The most worthwhile tribute that European governments can make Mario Draghi, the president of the European Central Bank, is to find a successor who most closely replicates his attributes and has the best chance of continuing his success. There are few harder acts to follow in global policymaking than his. He has helped rewrite the central banking handbook, shepherding the euro through an existential threat from the sovereign debt crisis and the danger of a deflationary recession. “Next ECB chief should be in the Draghi mould” August 30. 

I disagree and believe that FT, at some point down the road, will have to eat up these words of praise for Draghi; who alsopreviously served as the Chairman of the Financial Stability Board from 2009 to 2011 and Governor of the Bank of Italy from 2005 to 2011.

Draghi, as a regulator, with the risk weighted capital requirements for banks was partt of the team that introduced a risk-aversion, which ignored all the valuable services banks provided, when acting as the societies’ designated risk-takers.

Draghi, as a regulator, ignoring conditional probabilities, supported risk weighted capital requirements for banks based on the perceived risk of assets and not based on how banks could manage those assets dependent on their own perceptions of risk. That distorted the allocation of credit, causing among other banks to fall over a precipice when chasing those AAA to AA rated securities they were allowed to leverage a mind-blowing 62.5 times with.

Draghi, as a regulator, was, is, a statist of first degree, for agreeing with risk weights of 0% for the sovereign and 100% for the citizen.

Draghi, as a European central banker, who must have known that the challenges the euro posed had not been taken care of, irresponsibly agreed when Greece was assigned a 0% risk weight, which caused its current tragedy.

What Draghi did in ECB, was just to act as the principal member of that kicking team that kicked the crisis-can down the road, willfully ignoring the fact that European grandchildren will suffer when that can begins to roll back on them.

Sir, in summary, the next ECB chief should know about the importance of risk taking, about conditional probabilities, should not be a statist, and should be able to refuse punishing a EU nation, like Greece, for the mistakes of EU authorities. 

So, whatever it takes, he should be very different from Draghi. I would hold that EU’s own chances of survival depends much on that. 

@PerKurowski

August 29, 2018

Sweden sadly forgot risk-taking was the oxygen of its development.

Sir, Martin Sandbu, when discussing Scandinavian countries, the Nordic mixed model begins with: “Ten years ago, the global crisis laid bare the failures of financial capitalism.” “Nordic lessons for today’s socialists” August 29

That most still believe the crisis “laid bare the failures of financial capitalism”, is just the result of what seems to be one of the greatest cover up stories in mankind, promoted by those who want the regulatory mistake of the risk weighted capital requirements for banks to remain forever as something that shall not be named.

And it has absolutely to do with the subject discussed here because, one of the reason little Sweden, the Nordic country I best know, became such huge success, was the willingness of many Swedes to take extraordinary risks. In the Swedish Church psalm book we find a psalm that begs, “God make us daring”.

I find it outright shameful that a Swede, Stefan Ingves, could chair the Basel Committee and not enlighten his colleagues on risk-taking being the oxygen of development.

Of course, to top it up, that the risk weights are foolishly based on the risk of assets per se, and not on the risks of how bankers perceive and manage the assets, namely the conditional probabilities, makes it all so much worse. We will not have explosions fueled by risk-taking but much worse explosions fueled by excessive risk-aversion 

Today Swedish banks, as most of the world, are on route to build up extremely dangerous exposures to what is perceived as safe, like to sovereigns, residential mortgages or any other concocted security that manages to get hold of an AAA rating. 

Sir, today Swedes risk end up in their “safe” houses from which they have extracted all equity, and without the jobs needed to service their mortgages or to pay the utilities. Sad!

@PerKurowski

How many Greece will it take before the bank-sovereign doom loop is really discussed and then dismantled?

Sir, Isabel Schnabel, a member of the German Council of Economic Experts writes about a “contentious issue: the regulation of banks’ sovereign exposures. Currently, this benefits from regulatory privileges, being exempt from capital requirements and large exposure limits. The result is high volumes of sovereign debt on banks’ balance sheets, with a strong bias towards domestic bonds… it is up to the European Commission to shift this important issue to the top of the agenda”, “How to break the bank-sovereign doom loop”, August 29.

About time! It is now thirty years since regulators, with the Basel Accord, Basel I, introduced risk weighted capital requirements for banks; and thereto assigned risk weights of 0% to sovereigns and 100% to citizens, and so gave birth to the bank-sovereign doom loop.

It was European Authorities who assigned a 0% risk weight to Greece and thereby doomed it to its current tragedy.

If there is something the EC firsts need to come clear with, is how that happened.

When I first heard rumors about that regulatory statism, around 1997, I just did not believe it… I mean did not the Berlin wall fall in 1989? 

In a letter published by FT in November 2004, soon 14 years ago, I wrote: “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.” And of course that applies to developed nations too.

Why has this issue never really been discussed? How come the world has allowed itself to be painted into a corner with sovereign risk-weights it dares not change scared of that would on its own set off a crisis? Why did Greece have to pay for a EU mistake? Is that a way to treat a union member? And thousands of questions more.

Sir, how do we stop this "I guarantee you and you lend to me (against no capital)” incestuous relationship between sovereigns and banks?

@PerKurowski

August 26, 2018

Competition among banks is healthy for all, except when banks are allowed to compete on stratospheric capital leveraged heights.

Sir, Nicholas Megaw reports on some natural concerns derived from the fact that “Britain’s banks and building societies are loosening lending standards and cutting fees to maintain growth, as competition and a weakening housing market squeeze profit margins.” “UK banks loosen mortgage standards to maintain growth” August 26.

Competition among banks is always good, what were we borrowers to do without it? If as a result, some banks fail, so be it, and in fact that is quite necessary for the long-term health of the system. 

But when competition occurs where regulators allows too much leverage, because they also perceive it as very safe, then the very high exposures to the same class of assets, by many banks, can really explode and endanger the bank system.

So in conclusion, welcome the lowering of lending standards for loans to entrepreneurs that bank competition can bring about; but the capital requirements for banks when financing residential mortgages need to be increased, in order to make competition less dangerous. 

PS. Here is the somewhat extensive aide memoire on some of the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

August 25, 2018

Remittances that help family and friends to survive, sadly, usually, help keep in power those who forced migrants to leave their homelands.

Sir, Gideon Long (and Vanessa Silva) report “Migration has also helped Mr Maduro to stay in power. The UN estimates that 2.3m people — 7 per cent of the population — have left Venezuela since 2015. Many are prominent opponents of the regime and while their voices are still heard from exile, they are no longer in Caracas orchestrating protests.” “Venezuelans display resilience in face of hyperinflation” August 25.

But how many millions Venezuelans are kept alive by the remittances from their emigrant family members or friends? Several millions? So that clearly helps the Maduro government to hold on to power much more than the absence of some prominent (but also until now quite ineffective) opponents.

Fifteen years ago I served as an Executive Director in the World Bank. My Chair also represented nations from Central America like El Salvador and Honduras, which had millions of migrants working abroad, primarily in the United States, and from where with great sacrifices, they constantly sent their families vital monetary assistance.

As much as I admired these emigrants, I abhorred knowing that their remittances were also helping to keep in power those who were basically responsible for them having to emigrate.

For instance if we assume that migrant workers remit 20% of what they earn, then according to remittance data supplied by the World Bank, in 2008 and with respect to Honduras, we could calculate Honduran migrants gross earnings abroad, representing 122% of Honduras GDP. And so, in economic terms, where is really Honduras?

Time and time again I push for the idea that, as a minimum minimorum thank you for providing their homelands with these lifelines, the migrants should at least have an important representation in their respective general assemblies. That way they could at least try to change the realities so as to be able to go back to their homelands, before they forgot these. “No remittances without representation”.

We often hear about the dangers that brain-drain could represent for these countries. I always thought heart-drain to be much worse menace.

@PerKurowski

Bank regulators would do well reading up on Shakespeare (and on conditional probabilities)

Sir, Robin Wigglesworth writing about risk and leverage quotes Shakespeare in Romeo and Juliet, “These violent delights have violent ends”, and argues “It is a phrase investors in the riskier slices of the loans market should bear in mind.” “Investors should beware leveraged loan delights that risk violent ends” August 25.

Sir, we would all have benefitted if our bank regulators had known their Shakespeare better. Then they might have been more careful with falling so head over heels in love with what looks delightfully safe.

The Basel Committee, Basel II, 2004, for their standardized approach risk weights for bank capital requirements, assigned a risk weight of 20% to what was AAA to AA rated, and one of 150% to what is below BB- rated. 

That meant, with a basic requirement of 8%, that banks needed to hold 1.6% in capital against what was AAA to AA rated and 12% against what is rated below BB-.

That meant that banks were allowed to leverage 62.5 times if only a human fallible rating agencies awarded an asset an AAA to AA rating, and only 8.3 times if it had a below BB- rating.

That meant that banks fell for the violent delights of the AAA to AA rated, which of course caused the violent ends we saw in 2007/08.

Sadly, from what it looks like, our current regulators might not have it in them to understand what Shakespeare meant, just as they have no idea about the meaning of conditional probabilities… if they could they might be able to understand that what is ex ante perceived as risky is really not that dangerous.

@PerKurowski

Are our productivity, real salary, unemployment, and GDP figures up to date?

John Authers writes, “If ever there was a good place to take a deep breath and gain context on our unnecessarily complex world, it would be Jackson Hole, Wyoming” “Powell avoids foreign complications in the winds of Wyoming” August 25.

In a recent post in Bank of England’s blog “bankunderground” I read: “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

So, one interesting way for central bankers to get an understanding of our ever more complex world would be to ask them: If you deliver the same at work as a decade ago, but now you spend 50% of your working hours consuming distractions, on your cell or similar, how much has your productivity, your real salary, your voluntary unemployment increased? And what about GDP?

PS. Sir, as you well know, before initiating the Jackson Hole proceedings, I would love for all central bankers there to assist a seminar on the meaning “conditional probabilities.” Had they known about it before imposing their risk weighted capital requirements for banks it would have saved the world from a lot of problems.

@PerKurowski

August 24, 2018

During this year’s central bankers’ Jackson Hole meetings, will there finally be a seminar on conditional probabilities?

Sir, you write “The global economy and financial markets remain relatively benign, but the political environment in which central banks once operated has changed, perhaps for ever” “The tricky politics of being a central banker” August 24.

Indeed, but all is not that tricky for central bankers and their financial sector regulation colleagues. Just think of how they have all been able to progress, for soon thirty years, Basel I 1988, without any knowledge about conditional probabilities. 

Imagine, even after a 2007-08 crisis, caused 100% by assets that had extremely low capital requirements, only because these assets were perceived as extremely safe, and they have not yet been called out on that.

If I were to be invited, I would again ask them: Why do you believe that what’s perceived risky is more dangerous to our bank system than what’s perceived safe, have you never heard of conditional probabilities? But of course I am not invited.

Sir, again I will invest some hope that a “Without fear and without favor” FT journalist dares to asks that question. I must confess though that investment will be quite small, as I want to avoid having to be so disillusioned again.


@PerKurowski

August 23, 2018

To stand a real chance, Venezuela needs a solution that inspires at least a million of its emigrants, to immediately return to their homeland.

Sir, Ricardo Hausmann writes that for Venezuela “there is no road to recovery without the freedoms that underpin the market mechanism and without international financial assistance to kick-start imports and output. That will only happen after Mr Maduro leaves and this regime ends” “Maduro will not reverse an unprecedented economic collapse” August 24.

Indeed, but since so many of our landsmen are dying because of hunger and medicines, and the country is losing so much of its educated youth and that might find opportunities in other nations and never return, we need something much faster, much more drastic.

Hausmann states “by over-borrowing during the [oil] boom years: at over 600 per cent, Venezuela has the largest foreign public debt to export ratio in the world." If we include all the accounts payable hanging around it could even be much worse than that. 

My proposal is to capitalize on our creditors weaknesses. After excluding all those who clearly have no legal enforceable claims, and there are many of them, I would call all Venezuela’s creditors and tell them:

“Here, take all Venezuela’s oil extraction and refinery assets. Put these to work as fast as you can, so you have a chance to collect something of your credits, as fast as you can; and pay out all royalties that will be due for any oil extracted, directly, in equal parts, to all Venezuelans living in Venezuela, as fast as these can be deposited in their respective debit cards.

Then the Venezuelans would, with that money demand what they most want and need, and the market forces, in a country so blessed with so many other resources than oil, and freed from the interference of its odious redistribution profiteers, would respond, almost instantaneously.

A dream? Perhaps, but also the last thing I want for my country is a bailout a la Greece, one that leaves all our youth indebted forever.

And who knows, perhaps then even Ricardo Hausmann would leave Harvard Kennedy School and return home. I sure would!


@PerKurowski

Indeed, reforming the credit rating market is an urgent necessity. Indeed, shame on the regulators

Sir, Arturo Cifuentes concludes, “Reforming the credit rating market is an urgent necessity. Shame on the regulators” “Few lessons have been heeded 10 years after Lehman collapse” August 23.

Yes shame on the regulators! But also for some other reasons than those Cifuentes mentions.

Just for a starter, the credit rating agencies would never ever have caused so much damage had their opinions not been leveraged immensely by the risk weighted capital requirements for banks. Imagine, Basel II, 2004, allowed banks to leverage 62.5 times if only a human fallible credit rating agency assigned an asset an AAA rating. 

It should have been crystal clear that with that the regulators were introducing a huge systemic risk in the banking sector. That I mentioned for instance in a letter published by FT in January 2003; and I loudly explained and protested it while an Executive Director in the World Bank during those Basel II preparation days.

In Europe, the EU authorities even overrode the credit rating agencies opinions and assigned Greece a 0% risk weight, which of course doomed it to its current tragic condition. 

Then, let us mention the mother of all regulatory mistakes; for their risk weighted bank capital requirements, initiated in 1988 with Basel I, the regulators used the perceived risk of assets instead of the risks of those assets conditioned on how their risks are perceived? How loony, how sad, what a distortion, what a recipe for disaster was not that? And still, 30 years later, they do not even acknowledge their mistake.

By the way, when Cifuentes denounces that Solvency II, with its myopic risk view, will discourage insurance companies, the natural holders of illiquid assets, to hold these investments, and it will therefore increase the systemic risk by making their portfolios less diversified, I could not agree more.

Sir, you know that for over more than a decade I have written to Financial Times 2.787 letters objecting to the “subprime banking regulations”, this one not included. Galileo could indeed be accused for being obsessed with his theories, but, could those doing their utmost to silence his objections, the inquisitors, not be accused of the same?

PS. Cifuentes mentions “Olivier Blanchard’s 2016 admission that incorporating the financial sector in macro models would be a good idea”, I might have had something to do with that.


@PerKurowski

When will the world stop referring to those giving odious loans, odious credits, as investors?

Sir, the Lex column “Venezuela debt/Maduro: crypto communist” of August 23 writes: “It beggars belief that a country with the world’s largest oil reserves has failed financially…when prices for oil, its sole commodity, fell. Borrowing has filled the gap… Investors, including the asset management arm of Goldman Sachs, can look forward to a lengthy default”

In your editorial of August 22, “The desperate plight of Maduro’s Venezuela” you wrote: “Much of the world, especially supporters of “Chavismo” from the Panglossian left, has been disgracefully silent about Venezuela’s crisis for too long. The country is all but a failed state. As a drug-trafficking hub and the source of a huge exodus, it is already an exporter of instability.”

And I must ask when is the world going to stop referring to those who help finance regimes that are notoriously inept or/and commits awful violation of human rights as “investors”, and not as the lowly and dirty financiers they are?

Is for instance financing the smuggling of drugs more morally reprehensible than financing a regime like Maduro’s? Would you ever dream of introducing to your family and friends one who had helped finance the construction of Auschwitz, as an investor?

Yes, credit ratings might be needed, but more does the world need ethic ratings. It is way past time the world begins to understand that most odious debt there is, has its origin in odious credits, and that we need a Sovereign Debt Restructuring Mechanism that takes that in consideration.


@PerKurowski

August 22, 2018

Are identified non-performing loans truly riskier to bank systems than those many still out there waiting to be identified as such?

Sir, Arthur Beesley reports that “ECB’s Single Supervisory Mechanism, a watchdog created in 2014 to oversee eurozone banks, is pressing Irish lenders to achieve a 5 per cent NPL ratio in line with European norms”,“Irish banks step up efforts to shed bad debts” August 22.

Of course it is in general terms good when banks clean up their balance sheets but, I must ask: Why should identified non-performing loans be more risky to a country’s financial stability than those loans that could be about to be identified as such?

“A 5 per cent NPL ratio in line with European norms” That sounds precisely like what deskbound regulators might invent in order to show everyone they’re working hard. How much better would it not be for all if these regulators took some time off in order to take a course on the meaning of conditional probabilities; I mean so that could move away from that simpleton idea of risk weighting the capital requirement for banks based on the risks that are perceived.

“There’s a very healthy demand for loan assets on Irish property,” said Owen Callan, equity analyst at Investec in Dublin…[so] it’s not a bad opportunity to get rid of some of these loans in what is a very strong market.”

Great! But if that was not the case, should Irish banks anyhow have to obey regulators sitting in Fankfurt am Main inventing general rules that should apply to all European banks, independent of their particular realities… like they did when they assigned a 0% risk weight to Greece?

Sir, I would never have voted for Brexit but, each day that goes by and I see how EU authorities do not confront the real EU challenges; like how to handle the absence of a foreign exchange adjustment mechanism lost with the Euro; and instead promote themselves with all type of small issues that are better handled by local authorities, I get the feeling it might have not been such a crazy vote.

@PerKurowski

Even after the crisis there has been no change in who are represented when deciding on bank regulations.

Sir, Sarah O’Connor writes: “If we want groups to make fair decisions, our best shot is to make the groups representative of the people who are subject to those decisions.” Hear hear!, “Diversity coaching from the Olympic dressage event” August 22.

In the matter of bank regulations, where were all those who perceived as risky by the banks, like entrepreneurs, suffered the Mark Twain realities of bankers lending you the umbrella when the sun shines and wanting it back if it looks like it could rain?

Had they been present perhaps regulators would have understood the concept of conditional probabilities, and therefore had realized that assets perceived by bankers as risky become safer, not riskier; while assets perceived by bankers as safe become riskier, not safer.

Can you imagine how much tears, sufferings and lost opportunities that would have saved the world, primarily our young?

The saddest part of the story is that even after the crisis should have evidenced to all the regulators had no idea of what they were doing, there has been no changes at all in who are being represented when analysis and decisions are taken, so they still keep seeing and considering the risks in the same or quite similar way, the bankers are perceiving the risks. 

How good it would have in the Basel Committee some representation of the young who know that risk taking is the oxygen for the development they need, and that the older do not have the right to “safely” extract all equity from the current economies.

@PerKurowski

August 20, 2018

The main challenges for Greece are the same main challenges for the Euro and for EU

Sir, I refer to Jim Brunsden’s and Kerin Hope’s “Athens faces challenging road ahead as it reaches milestone exit from bailout programmes” August 20.

The authors summarize what Greece must do in order to grow out of its current tragic predicaments with: “In exchange for a big debt relief deal in June” Greece must “Hit the targets” like sustaining “a primary surplus of 3.5 per cent of gross domestic product annually until 2022.” “Stimulate the economy”, “Fix the banks” “Create an investor-friendly environment” and “build investor confidence by completing flagship privatisations”

What? “In exchange for a big debt relief” That’s laughable! Is it not more the case of cleaning up bank creditors balance sheets, or being able to keep Greek credits on the books, relief? How much would all EU creditors of Greece have been able to collect from Greece? Would EU have invaded a fellow EU nation?

No, if Greece is to have a chance of meeting any of its commitments then at least two things must happen: 

First: The EU must find a sustainable way for solving the challenges posed by the Euro. When the Euro was being launched in an Op-Ed I wrote: “Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive” And Sir, that bomb, now soon 20 years later, has not been deactivated, and EU has wasted precious time on much more comfortable issues. EU needs to find sustainable solution to it, just pushing the debt-cans forward will not do.

Second: If EU wants to survive and become a Union, then it needs to act as an adult and learn to assume the costs of its own mistakes. Let me be clear, again for the umpteenth time. Had not EU authorities assigned a risk weight of 0% to the governments of Greece instead of the 100% that the Greek tax paying citizens deserved, then the difficulties of Greece, in comparison to those it now suffers, would be minuscule.

Sir, those opposed to Brexit, the Remainers, should be working at that. Otherwise the Brexiters might soon tell them: “You see, thanks to us, we got out of EU, in the knick of time.

@PerKurowski

If output displacement hides productivity, so does input displacement.

Sir, Dr Peter Johnson, responding to Diane Coyle’s “Conventional measures pose the wrong productivity question” August 16, argues that “Shift in output definition [is] at the heart of the productivity puzzle” and concludes “We are not counting apples for apples”,August 20.

As one example of “output displacement” output Johnson writes that “A great deal of retail banking activity has been displaced to private individuals [as a result of internet technology] and is not included in the calculations of output or productivity.”

There is also the other side of that same mirror namely that which you could call input displacement. 

In a letter to you referring to that same article by Diane Coyle I mentioned a post by Dan Dixon, in Bank of England’s “bankunderground” blog, titled “Is the economy suffering from the crisis of attention?” 

It said, “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

Sir, if those interruptions were recorded for what they really are, reduced working hours and increased consumption of distractions, we would probably see a dramatic increase in productivity, in real salaries, in voluntary unemployment and in GDP.

In other words our current economic compasses might not be working properly, risking taking us in the wrong direction.

@PerKurowski

August 19, 2018

When the “filthy rich” buy assets, they might do it good or bad, but they are de facto voluntarily redistributing money.

Sir, Tim Harford writes “Researchers concerned about the concentration of money in the hands of a small number of people tend to focus on the income or wealth share of high earners”, “All things are not equal in measuring inequality” August 18.

Indeed, all things are not equal, the income or wealth shares of high earners, c'est pas la même chose.

The debates on inequality, promoted mostly by redistribution profiteers, conveniently ignore that the moment money, meaning Main-street purchasing power, is exchanged for an asset, it has effectively been redistributed, to the vendors of those assets.

So yes, governments can redistribute money, but that does not mean it can redistribute wealth as easy, and without possibly serious unexpected consequences.

Not long ago, someone really wealthy, by means of a sort of voluntary tax, froze US$ 450 million of his real purchasing power on a wall, by acquiring Leonardo da Vinci’s Salvator Mundi. How do you redistribute that painting? One way is to get another filthy rich to redistribute his money buying it, most probably for less. Another way might be cutting it in thousands of small-certified pieces and thereby allow many much less wealthy to buy these, and thereby perhaps redistribute much more than US$ 450 million. Should we proceed to hack up Salvator Mundi?

Sir, at the end of the day, the one question that always lingers is, who redistributes money the best? The usual answer “Me!” or “Us!”

@PerKurowski

August 18, 2018

Are bankers stopping their regulators from boarding a ‘listening bus’, scared these might wake up and then wake them up?

Sir, Gillian Tett asks: “can lofty chief executives ever find a way to get out of the C-suite and view life from a completely different perspective?” “Jamie Dimon’s ‘listening’ bus? Get on board

Sir, of course it is good that Jamie Dimon, or anyone else for that matter, tries to listen to different opinions, though a bus is not really needed for that. 

But much more important than Jamie Dimon doing so it would be for the lofty besserwisser bank regulators to walk down Main street in order to learn more about banking, and life.

Then they might begin to understand that it is not what bankers perceive as risky which is dangerous to the bank system, it is what they perceive as safe.

But, being able to hold assets perceived as safe against so little of bank equity, meaning obtaining the highest returns on equity with what’s “safe” and not having therefore to venture into riskier terrains, sounds like a banker’s wet dream come true. Therefore perhaps it is bankers, like Dimon, whom all block regulators from leaving their desks, except for some controlled visits to Davos and Jackson Hole.

PS. As the less equity that needs to be compensated the more room there is for big banker bonuses, I am really not referring to an insignificant wet dream

@PerKurowski

For better transparency should newspapers have a section of “Journalism” and one of “Political Activism”?

Sir, Rana Foroohar discussing the issue of ever growing student debt, ends her review of Devin Fergus’s book “Land of the Fee”, with: “Perhaps the new generation of millennial socialists rising in the US should make this the issue they tackle first”, "Slow bleed" August 18.’

What’s wrong with plain millennials? Do they have to be socialists? Or is Foroohar more than a journalist an activist?

Sir, since many years I have been arguing that higher education should be much more of a joint venture between the students and their Alma Maters; and that financing preferentially educational costs would just leave over-indebted students and enriched professors. Just as financing preferentially house purchases benefits those who have invested in houses, much more than those who want a house just to be their home.

Here below are two of my tweets that I think cut over political lines, but that therefore might not be of too much interest to redistribution or polarization profiteers.

1. “Instead of taking on debt, perhaps students should go for crowdfunding their study costs, offering to pay a percentage of their incomes during their first 15 after graduation years. If so would not investors want their professors to have some skin in the game too?

2. “Would insurance companies be willing to invest in the future by financing students against a percentage of their first 15 after graduations years of income? Would IRS be willing to certificate the incomes of these students for the investors?”

I have now ordered, “Land of the Fee” and so I will keep my comments till after I read it. That said I am sure I will again have to ask: Where was FT when regulators risk weighted sovereigns 0% and citizens 100%? Where was FT when regulators allowed banks to leverage 62.5 times only because an AAA rating issued by human fallible rating agencies was present? Where is FT on that all the real benefits of securitization do not accrue those securitized, much the contrary securitization profits are maximized when hurting the most

@PerKurowski

August 17, 2018

If it now takes researchers much more time to come up with ideas, how much of that is caused by their consumption of distractions?

Sir, Diane Coyle writes that current productivity data does not consider what’s achieved through outsourcing since GDP excludes all the intermediate links in the chain and the additional value is netted out. If included “economic output would look somewhat better than the current statistics suggest. “Conventional measures pose the wrong productivity question” August 16.

But when Coyle refers to “a recent paper a group of economists from Stanford University and the Massachusetts Institute of Technology…calculate that it now takes more than 20 times the number of researchers to generate the same economic growth as it did in the 1930s.” I would have to ask: Does that calculation take due consideration of the ever-growing time researchers spend, not working, but consuming distraction on the cell phones or laptops?

Some months ago, in Bank of England’s “bankunderground” blog, we read a post by Dan Nixon titled “Is the economy suffering from the crisis of attention?” It said, “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

If those distractioninterruptions were recorded for what they really are, we would probably see a dramatic increase in productivity, in real salaries, in voluntary unemployment and in GDP.

In other words our current economic compasses might not be working properly, risking taking us in the wrong direction.

@PerKurowski

If we want real productivity data, we need consider real working conditions

Sir, I refer to my former colleague at the World Bank Kurt Bayer’s letter of August 16, “Real productivity is an efficiency measure”. I fully agree with what he argues, though, unfortunately, lately, life has become more complicated, even for statisticians. 

Some months ago, in Bank of England’s “bankunderground” blog, we read a post by Dan Nixon titled “Is the economy suffering from the crisis of attention?”. It said, “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

And so these interruptions should have to be recorded for what they are, meaning a consumption of distractions during working hours. If so, we would perhaps see a dramatic increase in productivity, in real salaries, in voluntary unemployment and in GDP.

In other words our current economic compasses might not be working properly, risking taking us in the wrong direction.

@PerKurowski

August 15, 2018

If building houses where they are actually wanted, which we should, what do we do with the unwanted lot?

Sir, Robin Harding holds “What should not be in doubt is that supply limits are the single biggest problem with housing… reform the planning rules, and let people build homes where they are actually wanted.” “Planning rules are driving the housing crisis” August 15.

I agree, of course we should build houses where they are actually wanted, but the challenge of what to then do with the unwanted lot, poses major difficulties. 

It is not solely “the role of falling interest rates in pushing up house prices” that has caused houses to become financial assets. Much other preferential treatment is given to the financing of house purchases. Among other, because the financing of houses is perceived so safe by regulators, banks need to hold much less capital against residential mortgages than, for instance, against loans to entrepreneurs. (Those entrepreneurs who could create the jobs that would allow for mortgages to be duly serviced and utilities to be paid).

All that has helped house prices to shoot up and become the most important financial asset for way too many, whether for the owners, or for the banks or other who have helped many owners to extract whatever equity he had in his house.

As a consequence our society, our economies, have become mindboggling exposed to the need of keeping up house prices, while simultaneously needing house prices to become more affordable. To navigate well those waters will not be an easy task. 

Looking at some demographic realities perhaps what needs to be done is not to build more houses, but to build more senior citizens residences, thereby freeing many upstairs so that children could move up from the basements or other young move in.

@PerKurowski

August 14, 2018

The regulators should also care about their own internal governance standards.

Sir, Gary Dixon referring to Caroline Binham’s report “Record caseload for UK financial regulator” (August 13) writes, “FCA is now paying increased attention to the internal governance standards of regulated firms... all regulated firms should be taking steps now to improve their board standards as a matter of priority.” ,“Governance standards have become FCA’s focus” August 14

The regulators should also urgently take steps to improve their own government standards. I mean how could they have signed up to those risk weighted capital requirements for banks based on the nonsense that what’s perceived risky is more dangerous to bank systems than what’s perceived as safe? 

And those in EU, how could they have assigned a 0% risk weight to Greece and thereby doom it to suffer the tragedy of way excessive public debt?

@PerKurowski

EU bank regulators have clearly proven themselves to be a source of systemic risk

Sir, Jan Toporowski writes that the “White House…represents a much more serious systemic threat to European banks. European governments and the ECB need to rethink how European banks are funded and regulated.”, “Threat to European banks of US political agenda”, August 14.

That could be but, foremost, it is the EU that needs to rethink how European banks are regulated. The 0% risk weight that for the purpose of bank capital requirements was assigned to Greece was, without any doubt, what caused that country’s excessive public debt tragedy. And did any EU authority offer to help Greece in order to compensate for that mistake? No! Not even the slightest “We’re sorry”. They do not even acknowledge their mistake… they just keep on blaming Greece.

@PerKurowski

August 13, 2018

We need to rethink productivity data, in light of so many “working hours” spent consuming distractions.

Sir, referencing Chris Giles’ and Gavin Jackson’s “Surge in low-value jobs magnifies UK productivity problem” of August 13, I believe that whenstating “increases in low-wage jobs in bars, social work and warehouses have served to hold back UK productivity growth” it hints at sort of causation that might not really be there.

I say so because we have entered a new era that requires redefining entirely the ways we measure productivity. 

Some months ago, in Bank of England’s “bankunderground” blog, we read a post by Dan Nixon titled “Is the economy suffering from the crisis of attention?”. It said, “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

Nixon, answering the question posed in the title wrote, “The most obvious place to look would be in productivity growth, which has been persistently weak across advanced economies over the past decade.”

But, what if instead of being recorded as distractions during working hours, these were to be recorded as a private consumption that reduces the effective working hours? Would that not increase GDP and reduce working hours, and thereby point instead to a dramatic increase in productivity?

In the same vein, would then not real-salaries, instead of stagnating, have been increasing a lot?

And what about our employment and unemployment data if the time used to consume distractions during working hours would not be counted as work? 

Sir, it behooves us to make certain how we measure the economy gets updated to reflect underlying realities. 

Perhaps then we are able to understand better the growing need for worthy and decent unemployments.

Perhaps then we are able to better understand the need for a Universal Basic Income, not as to allow some to stay in bed, but to allow everyone a better opportunity to reach up to whatever gainful employments might be left, like those “low-wage jobs” that it behooves us all, not to consider as “low value jobs”

@PerKurowski

August 10, 2018

Trade tariffs revenues should at least try to compensate those hurt the most.

Sir, John Authers writes of the facts of life that give “Free trade the strange ability to convince everyone, rich or poor, that they have lost by it”, “Nafta’s losers always drown out its winners” August 10.

Tariffs are used to supplant market decisions. Sometimes it could be good, like for instance when making sure your “Arsenal Of Democracy” is fabricated on homeland, but most often it is bad, only helping to enrich those capitalizing on crony statism.

Whatever, in any case there should be much more transparency on who are then going to decide, instead of the market, on the use of all revenues provided by the tariffs.

I argue this because, if for instance 100% of those tariff revenues went to finance a Universal Basic Income, then at least those most hurt would be partially compensated… and the redistribution profiteers would think less favorably of these tariffs.

@PerKurowski

It behooves EU technocrats to find out what Europeans want and do not want to come out of Brexit.

Sir, Karin Kneissl, even by daring to explain some historical reasons for why Britain might not really belong in EU, makes a firm and clear call, to all the parties directly involved in the Brexit negotiations, to come back to their common senses. “A pragmatic approach to Brexit will pay off for both sides” August 10.

Hopefully it will give those many in Britain (including some in FT) who seem to want Brexit to fail, big, so that they can say their “We told you so”, some reason to recapacitate. Of course many of them, just like many Trump enemies in the US, are beyond the point where they would be able to do so.

If Karin Kneissl wants to help even more she should give Mr. Negotiator Barnier a call, and remind him that it behooves him, and all other EU technocrats, to find out what Europeans want and do not want to come out of Brexit. That this has not been done is sincerely amazing and only points to way too much besserwisser arrogance playing a role.

And Sir, if Brexit fails big, it is not certain at all that the loudest protesters would be British. Among Europeans, Britain counts with much more sympathy than what all commissioners, whose egos were hurt with Brexit, think it has. A French finding it harder to visit London is just as likely to be upset than a Brit finding it harder to visit Paris… perhaps even more “Mon Dieu, que dirait de Gaulle?”

@PerKurowski

August 09, 2018

How much of billionaires’ wealth might have de facto already been redistributed?

Sir, John Gapper writes interestingly, from the perspective of how these are designed, about “public art museums funded by billionaires”. He concludes in that, as so many follow the same principles; it is beginning to have similitudes to a franchise. “Billionaires are franchising the art museum” August 9.

Currently in the political market, way too often we hear offers phrased in the simplistic terms of: “Let’s take it from the filthy-rich and give it to the poor and, Puff! all odious inequality will have disappeared.”

In order to stop the creation of those false expectations, which at the end only leads to frustrations and the enrichment of the of the redistribution and/or polarization profiteers, by increasing the value of their franchises, there is a real societal need for much more information. 

Like, what wealth to be redistributed are we talking about? How much might billionaires have already de facto redistributed their Main-street purchasing capacity wealth, by demanding and buying assets that no one else but them would be demanding, at least not at those ridiculously high prices?

Not long ago, someone really wealthy, by means of a sort of voluntary tax, froze US$ 450 million of real purchasing power on a wall, by acquiring Leonardo da Vinci’s Salvator Mundi. Sir, I ask, how do you redistribute that painting without perhaps serious unexpected consequences? Cutting it in thousands of small-certified pieces, and selling these in the market for much more than US$ 450 million? 

@PerKurowski

August 06, 2018

To really understand the 2007-08 crisis, it is the ex ante perceived risks that should be used, and not the ex post understood risks

Sir, Martin Sandbu, when reviewing Ashoka Mody’s “EuroTragedy: A drama in nine acts" writes: “Mody nails the biggest policy error of them all: the insistence that euro member states could not default on their own debt, or allow their banks to default on senior bondholders.” “A crisis made worse by poor policy choices” August 6.

That refers indeed to a great ex-post crisis policy error, but not to the biggest error of all, that which caused the crisis, namely the ex ante policy of the regulators, for the purpose of their risk weighted capital requirements for banks, assigning all EU sovereigns, Greece included, a 0% risk weight.

Mody (on page 168) includes the following: “If, for example, €100 of bank assets generate a return of €1, then a bank with €10 of equity earns a 10 percent return for its equity investors, but a bank with only €5 of equity earns a 20 percent return.” Though not entirely exact (because it might be slightly more difficult to generate that €1 with less capital) it shows clearly Mody understand the effect on returns on equity of different leverages.

But what Mody, and I would say at least 99.9% of the Euro crisis commentators do not get, or do not want to see, or do not dare to name, is that allowing banks different leverages for different assets, based on different perceived, decreed (or sometimes concocted) risks, distorts the allocation of bank credit to the real economy. In the case of the Euro, the two shining examples are: the huge exposures to securities backed with mortgages to the US subprime sector that, because they got an AAA to AA rating, could be leveraged 62.5 times; and the exposures to sovereigns, like Greece.

Sir, let us be clear, there is no doubt whatsoever that, had for instance German and French banks have to hold as much capital/equity against Greece that they had to hold against loans to German and French entrepreneurs, then they would never ever have lent Greece remotely as much.

The other mistake that Mody in his otherwise excellent book makes, and which is one that at least 99% of the crisis commentators also make, is that they fall into the Monday-morning-quarterback trap of considering ex post realized risks, as being the ex ante perceivable risks. Mody refers in the book to that George Orwell might have written about narrating history “not as it happened, but as it ought to have happened” In this case the risk referred to, are not the risks that were seen but the risks, we now know, that should have been seen.

Sir, Ashoka Mody’ EuroTragedy has so much going for it that it merits to be rewritten. Just reflect on what it means for the Greek citizens having to pay the largest share of sacrifices, for a mistake committed by European technocrats.

PS. Mody goes into the details of the demise of “the smallest of Wall Street’s five top tier investment banks” Bear Stearns. It “was an accident waiting to happen… it had borrowed $35 for every dollar of capital it held”. Had Mody added the fact that Bear Stearns had been duly authorized by the SEC to leverage this much and even more, the recounting of the events would have been different.

@PerKurowski

Give us a “Family and Friends' Facebook” and a “No Man’s Land Facebook”

Sir, John Thornhill “Several proposals for “fixing” Facebook are flying around; none looks wholly convincing. Maybe Financial Times readers have some smarter ideas.” “How to fix Facebook” August 6. Here follows a response to that challenge:

If I use Facebook strictly with my friends and families, fake news, or obscene behavior would not be a major issue, since I have quite a clear idea who in my circle would want to engage with that, and I have therefore my own powers to contain it.

The problem is when suddenly a third unknown, or by me uninvited party gets access to my circle, in order to peddle us a news or an opinion, in which he has an interest and quite likely we don’t.

So one alternative would be to have a family and friend Facebook, in which the only thing third parties could do was to advertise products and services, not post opinions, nor of course try to sell us political pamphlets. Would I be happy with such a Facebook? If the number of those ads, in consideration to my limited attention span, were limited to two or three per hour why wouldn’t I? 

Then there could be an open access Facebook to which any person, not a family and friends circle, can subscribe to and that would resemble the current Facebook. A sort of “Throw anything you want at us” Facebook.When on it, we would all be quite clear with that we will be fed fake news, and odiously polarizing opinions, and that in all essence we are on our own, running under fire, in no mans land. 

Would such split hurt Facebook’s profits? Not necessarily but, if so, it would also reduce the general risks for Facebook (and alike) to be subject to fines, since it would be much harder to hold it responsible for any misbehaviors occurring in the No-Mans Land’s Facebook. 

That said, to also diminish the amount of “odiously polarizing opinions”, something that behooves us all, Facebook should try developing algorithms that, using the whole web, tries to establish and then keep out, those who are looking mostly for some monetary enrichment. That could get about half of the polarization profiteers, the other half being of course much harder to identify, since they are mostly looking for political enrichment.

Talking with a knowledgeable friend he expressed curiosity about how much Facebook used linguistic experts when trying to identify fake-news or other bad behavior. He’s got a good point, though my first reaction was, in this world with constant changes in how we express ourselves, how on earth do we identify a qualified linguistic expert? And if Facebook is able to identify a qualified and diversified linguistic expert team, with perhaps Oxford professors, hip-hoppers and young street wise kids, how do you get them to work together and keep them united? 

And how do you in general avoid fake-news experts being gamed? Perhaps randomly picking fake news identifiers out of a large universe of volunteers, and changing these every couple of minutes, paying them well for their few moments of dedication could be an alternative. An Uber for Fake-News hunting? Sir, it’s a hard knock web!

PS: Sir, what do you think Facebook’s experts would say about the Basel Committee’s news: “That which is perceived risky, is more dangerous to our banks than that which is perceived safe”? True or Fake? 

@PerKurowski

August 05, 2018

Populism is not the exclusive domain of politicians and autocrats. Even technocrats practice it and experts fall for it

Sir, Ray Dalio, Bridgewater’s founder, told Gillian Tett “that the proportion of the western world voting for populist candidates had risen to 35 per cent. The figure, from a report by his firm, was starkly higher than at the start of the decade, when it was 7 per cent.” She finds that “unnerving on several levels” “Economics alone does not explain the surge of populism” August 4.

It is now ten years since a crisis caused exclusively by assets that because these had been perceived, decreed or concocted as safe banks could hold against very little capital turned out to be risky. And still so few question the wisdom of basing regulations on the belief that what is perceived as risky is more dangerous to our bank system than what is perceived as safe.

So Sir, I find it even more unnerving that seemingly 99.9% of regulatory experts, economists and financial journalists do still seem to believe, and ever refuse to question, those populist regulators who tell us they know all about bank risks, so as to make our banks safer with their risk weighted capital requirements.

Yes, many voters might fall for nice sounding populist promises, but others too, perhaps even you Sir, can sometimes not be able to resist these. Imagine, safe banks at no cost, does that not just sound too sweet not to believe?

@PerKurowski

August 04, 2018

To rise to the level of incompetence, “The Peter Principle”, has clearly been applicable in the case of current bank regulators

Sir, Sir Cary Cooper of Alliance Manchester Business School, when commenting on Tim Harford’s Undercover Economist column “We should not let bad managers stick around” (July 21), and the Peter Principle writes: “When promoting staff, many place disproportionate importance on a good run of form/current performance over their talent and skills to do the job they’re being promoted to. A good backbench politician won’t necessarily make a successful minister.” “Don’t allow ambition to cloud our talent judgment” August 4.

Indeed, and that is exactly what has happened to our bank regulators. One thing is to be a banker and carefully analyze the risk for the bank, and another, completely different, is to be a regulator having to analyze the risks of the bankers not being able to correctly analyze or respond to risks.

In this respect all current regulators, who could have been doing reasonably well analyzing individual small banks, when they still keep on thinking that what is perceived as risky is more dangerous to the bank system than what is perceived as safe, they have clearly risen to their level of incompetence.

PS. By the way, talking about business schools, why have they all kept mum on this? Could it be that all there wanted to be bankers and enjoy the big bonuses that could be paid when there is so little equity that needs to be remunerated? Or is it that they just don’t want to be seen as bankers’ party-poopers.

@PerKurowski

August 03, 2018

To be able to make our banks safe, at no cost, is a dream that passionately blinds way too many, like the Financial Times.

Sir, with respect to Bank of England’s interest rate increase you explain it with “The decision had all the hallmarks of a committee that has decided that it will only be comfortable when rates are at a higher level that feels more natural”, and so sees what it wants to see, and so you argue “It is far better for central banks to be more clearly and dispassionately guided by the data” “A rate rise and a Bank of England false step” August 3.

Of course, except those for some special reasons need blissful blindness, it is better for most “to be more clearly and dispassionately guided by data”. 

But let me ask you Sir: What data, during the last decades have you seen that in any way shape or form could support the current pillar of bank regulations, namely that what is ex ante perceived as risky is more dangerous to our bank systems ex post, than what is perceived as safe? 

None? Might it then not be that you are also too passionate about hoping to make our banks safe at no cost, so as to understand the data, or the lack of it? Or are you perhaps so passionate you do not even want to see any data that contradicts it.

Yes, I am obsessive about the distortions in credit allocation that the risk weighted capital requirements for banks cause, but Sir, you are just equally, or even more, obsessive with ignoring it.

@PerKurowski

Cutting taxes by means of inflation adjustment vs. reducing regulatory subsidies to state borrowings?

Sir, Sam Fleming reports “The Treasury has been examining the merits of adjusting capital gains taxes for inflation” “White House push to cut taxes for rich faces thorny obstacles” August 3. 

Fleming points out that the “initiative could cost $100bn or more over 10 years” and “Estimates from the Congressional Research Service suggest as much as 90 per cent of the benefits would go to the top 1 per cent of households.

Steve Moore, a visiting fellow at the Heritage Foundation opines: “It would be good for the economy. This is something we as free market people have been talking about for a long time.”

I am for free-markets, and I defended with great enthusiasm even more extensive inflations adjustments when they were introduced in Venezuela some decades ago, clearly before its current anti-free market regime came to power.

That said I would now use this occasion to ask, are such inflation adjustments, which reduces tax income, really compatible with the 0% risk weight assigned to the quite sizable US debt for the purpose of the capital requirements for banks?

That 0% risk weighting, de facto subsidizes US public debt, and which, on the tune of some 21 trillion in debt, could easily represent $100bn or more over 10 years.

If I were to choose, both from fairness and a free market perspective, I would much rather cut the bank credit distortions in favor of the sovereign than the inflation adjustment.

Just for a starter that would allow all to see better what the real unsubsidized interest rate on government debt is, and that should be useful, except fro those who do not want that to be known. 

PS. With a 0% interest rate, a 2% inflation target, how can regulators argue a 0% risk weight for a sovereign? That is of course unless they are from Venezuela or Zimbabwe, and only think of honoring public debts in nominal terms with the printing machine.

@PerKurowski

The Stock Exchange should report, in real time, the current average holding period for each security.

Sir, Megan Greene writes: “The average holding period for a security on the New York Stock Exchange has fallen from two months in 2008 to just under 20 seconds today, according to analysis from Cumberland Advisors” “Passive investing is storing up trouble” August 3.

I had no idea we were into holding periods measured in seconds. Some years ago U.S. Sen. Mark Warner mentioned "The average time someone used to hold a share of stock back in the ’60s was eight years.”

Seeing this, it’s clear the stock market should begin to report the individual holding period for each security. Any ordinary investor, who makes his own slow analysis to come up with a decision whether to buy or sell, I assume would not really want to be competing against computers working in milliseconds… distant from fundamentals.

And Megan writes about the systemic risk present in “Passive investments… Often set up to mimic an index, ETFs have to buy more of equities rising in price, sending those stock prices even higher…creates a piling-on effect as funds buy more of these increasingly expensive stocks and less of the cheaper ones in their indices — the polar opposite of the adage “buy low, sell high” … [with] no regard for underlying fundamentals”.

In that Megan is not very far away from that systemic risk I so often write to you about, namely that of higher capital requirements for banks against what is perceived safe than against what is perceived risky. First, those capital requirements take no consideration of the purpose of the credit; and second they are the polar opposite of what they should be, since what is perceived as safe is in fact much more dangerous to our bank systems than what is ex ante perceived as risky.

@PerKurowski

FT, though fearlessly blaming accountants, seems to sheepishly favor bank regulators.

Sir you write: “Unscrupulous managers, increasingly rewarded with equity incentives linked to accounting measures, have exploited the system. By writing up asset values in line with market values — whether real or estimated — they could book profits, distribute dividends, boost share prices and make incentive payments. Consider investment bankers’ bonuses, distributed ahead of the 2008 financial crisis but based on asset values that tumbled only months later.” “Reform accounting rules to restore trust in audit” August 3.

I agree, quite often accounting is a tool used for not quite ethical behavior. But, when you refer to the investment bankers’ bonuses, you are sure pointing in the wrong direction.

I dare you dare to go back and look at how these investment (and European) banks, before the 2008 crisis, were leveraged with assets perceived (mortgages), decreed (sovereigns) or concocted (AAA rated securities) as safe. Do you think that if they had been required to hold as much capital against these assets, as they needed to hold against assets perceived as “risky”, like loans to entrepreneurs, there would have been room available for all those bonuses? No way Jose!

And you do seem to suggest somehow that the accountants, before that crisis, should have considered the possibility of asset values tumbling only months later. Sir, the explosion, and its real causes, is much more important than the how it is accounted. If accounting is to become even more predictive then we are surely feeding even more worms into that open can of undue behavior.

When we have regulators who believe that what is perceived as risky is more dangerous to our bank systems than what is perceived as safe, I assure you that much more important than reforming any accounting rules, is reforming bank regulation rules. 

Sir, whenever, for whatever great sounding reason, it is argued that banks should not be required to hold more capital, you can be sure there are some neo-bankers thinking about their bonuses behind it.

PS. Neo-bankers? Yes because that is not the bankers I remember. Then they were savvy loan officers, now they are just equity minimizing financial engineers. I am sorry for feeling quite nostalgic.

PS. Most of the bonuses that are currently paid out to bankers, are still firmly rooted in the low capital requirements against what is perceived, decreed or concocted as safe.

@PerKurowski