October 31, 2018

The Honduran migrants chase a more reachable American dream, so as to be able to chase a more unreachable Honduran dream

Sir, Jude Webber writes: The scope of Wilson Flores’ American dream — to send money home to his mother and younger siblings, and eventually to go back to Honduras and open a shop — is modest.” “Honduran migrants chase the American dream” October 31.

It is a sad dream. Even if Flores manages to get into America and get a job, the money he will send home to his mother and younger siblings, will also be helping to finance the permanence in power of the system that made him migrate in the first place, and so he might never be able to go back and realize his Honduran dream.

I was an Executive Director at the World Bank, 2002-04, representing, among other, Honduras. There I did what I could to remind everyone that when compared to the remittances sent home by the Central-American migrants, all other support by donors and multilateral institutions were peanuts. In fact I repeated whenever I could that for instance what the Honduran migrants earned gross in the US, was more than the GDP of Honduras, which should make you wonder sometimes where the real Honduras is.

And I protested loudly when by means of diaspora bonds many tried to capture even more of the migrants’ savings, to finance their governments even more. 

On top of it all, those Honduras migrants had/have much less influence in their homeland than foreigners…and so I frequently argued “No remittances Without Representation.” 

If host nations, like the United States wanted to reduce the flow of migrants, one way positive way would be to help the migrants gain political power in their homelands, so as to help them create the conditions that could allow them to return… and live their Honduran dream. As an absolute minimum the migrants should have a sizable representation in their respective congresses or parliaments.

Down the line, if a majority of the citizens of a nation have migrated, like 51%, and if they suddenly wanted to take back their country by democratic powers, or even with force, would that be classified as foreign intervention, as an intromission into a sovereign’s domains?

Sir, more than a decade later, these sincere concerns I had, are sadly not longer just about my friends from Honduras or El Salvador, they are much closer home; they are about my landsmen the Venezuelans. For a starter what would now be happening in Venezuela, without family remittances?

@PerKurowski

October 30, 2018

Our bank regulators, just like "Sulley" Sullivan and Mike Wazowski, fear the wrong thing.

Sir, Martin Wolf, discussing US-China relation ends with, “Our enemy is not China. Have confidence in our values of freedom and democracy. Understand that it is on the creation of new ideas that we depend, not the protection of old ones. That in turn depends on freedom of inquiry and openness to the best talent from around the world. If western countries lose these, they will lose the future. As the greatest US president of the 20th century declared: “The only thing we have to fear is fear itself.” “America must reset its rhetoric on China’s rise” October 31.

Absolutely! But why then it is so hard to get Mr. Wolf to understand that current risk weighted capital requirements for banks, which so dangerously distorts the allocation of credit to the real economy, is nothing but an expression of fear… and to top it up a completely unfounded one

Just as "Sulley" Sullivan and Mike Wazowski in Monsters Inc. thought that children were toxic to them, the regulators are convinced that what’s perceived as risky is what’s dangerous to our bank system. Of course it is what’s perceived as safe that poses the real dangers.

Wolf asks, “What has been the most important event of 2018 so far?” He answers “arguably, it was the speech on US-China relations by Mike Pence, US vice-president, on October 4.”

I would hold that the most disastrous important event during the last three decades was the introduction, in 1988, with the Basel Accord, of these so utterly silly and naïve risk adverse regulations. That year the Western world said no ti the risk-taking that has been the oxygen of its development.

Sir, again, let me remind you that just for a starter, had no banks been allowed to leverage with assets over 60 times only because these were AAA rated, or limitless with loans to sovereigns like Greece and Italy, we would all be in a much different and surely better world.

When is Martin Wolf going to stop protecting old senseless fears?





They inject loads of liquidity, keep interests ultra-low and distort bank credit… and then they call the system results, systemic risks

Sir, Colby Smith reports “the booming $1.3tn market for leveraged loans — or those extended to highly indebted companies that are then packaged up and sold to investors as bonds — has faced a tide of criticism from central bankers and financial watchdogs. Former US Fed chair Janet Yellen warned of the “systemic risk” rising from the loans.” “Systemic risk fears intensify over leveraged loan boom” October 30.

Smith quotes Douglas Peebles, the chief investment officer for fixed income at AllianceBernstein with “Investors are deathly afraid of rising interest rates so the floating rate component paired with the fact that these loans have seniority over unsecured bonds set up an easy elevator pitch to buyers that may not be fully aware of the risks”

Why are investors deathly afraid of rising interest rates? Clearly because the rates being so low for so long, paired with huge liquidity injections has built up a mountain of fix rate bonds that few dare touch; except those who by means of lower capital requirements are given strong incentives to go there, like banks and insurance companies.

In this respect “the booming $1.3tn market for leveraged loans” is not a systemic risk but a system result. That regulation that increases the exposure of banks and insurance companies to long term fixed rate bonds, and thereby increases the interest rate risk, that is a real systemic risk. The problem though is that central bankers and regulators will never want to understand they are the greatest generators of systemic risks… as Upton Sinclair said “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

@PerKurowski

October 29, 2018

If Paul Volcker leaves an explanation for why a person like he never saw the dangers of the risk weighted capital requirements for banks, it would be a truly important legacy.

Martin Wolf, the Chief Economics Commentator of the FT, rightly praises Paul Volcker for his gigantic work, as chairman of the Federal Reserve between August 1979 and July 1987 of slewing the run away inflation of those years. How could one like me who in 2006 wrote about the long-term benefits of a hard landing, disagree with that? “The last testament of Paul Volcker”, October 30.

But then Wolf opines: “Yet, unlike many who should have known better, he understood that the central bank is responsible for financial stability, too. The book is full of Volcker’s painful experiences with the financial sector and his deep doubts about it… 

It would be too much to insist that the financial crisis would not have happened if Volcker had been Fed chairman in the 2000s. But he would have done his best to prevent it.”

And there Wolf and I part ways, sadly, because Volcker was also a true hero of mine. As I found out, in March 2016, Volcker is one of the main original driving forces behind the insane risk weighted capital requirements for banks; so he sure helped to cause the crisis.

What could have come into the mind of a man like Wolf describes, “endowed to the highest degree with what the Romans called virtus (virtue): moral courage, integrity, sagacity, prudence and devotion to the service of country”, to consider that this way of interfering in the allocation of bank credit to the real economy, could bring stability without risking any other serious consequences? An effort to answer that would also be something very valuable to see included in a Paul Volcker’s testament,

PS: Charles Goodhart’s “The Basel Committee on Banking Supervision: A History of the early years 1974-1997” 2011, Cambridge Press Goodman (p.167) refers to Steven Solomon’s “The Confidence Game: How Unelected Central Bankers Are Governing the Changed Global Economy” (1995). In it we read:

On September 2, 1986, the fine cutlery was laid once again at the Bank of England governor’s official residence at New Change… The occasion was an impromptu visit from Paul Volcker… When the Fed chairman sat down with Governor Robin Leigh-Pemberton and three senior BoE officials, the topic he raised was bank capital…

At dinner the governor’s hopes had been modest: to find areas of sufficient convergence of goals and regulatory concepts to achieve separate but parallel upgrading moves… 

Yet the momentum it galvanized… produced an unanticipated breakthrough of a fully articulated, common bank capital adequacy regime for the United States and United Kingdom. This in turn catalyzed one of the 1980’s most remarkable achievements – the first worldwide protocol on the definitions, framework, and minimum standards for the capital adequacy of international active banks…

They literally wiped the blackboard clean, then explored designing a new risk-weighted capital adequacy for both countries… 

It included… a five-category framework of risk-weighted assets… It required banks to hold the full capital standard against the highest-risk loans, half the standard for the second riskiest category, a quarter for the middle category, and so on to zero capital for assets, such as government securities, without meaningful risk of credit default.”

@PerKurowski

EU authorities, assigning Italy, like Greece, a super duper investment grade status, are the original sinners.

Sir, Wolfgang Münchau writes,“The main instrument of coercion in the eurozone is not its fiscal rules, but the power of the European Central Bank to withdraw funding from national banks. This is not a discretionary power, but one that is automatically triggered once a country‘s sovereign debt loses investment grade status. If the banks have large holdings of their home countries’ debt, as is the case in Italy, they are setting themselves up for failure if their governments run an unsound fiscal policy” “Italy is setting itself up for a monumental fiscal failure” October 29.

“Triggered once a country‘s sovereign debt loses investment grade status”? Should in the first place Italy have gotten the super-duper investment grade status assigned to it by EU authorities? By mean of “sovereign debt preferences” they assigned it a 0% risk, which allow banks to hold Italian public debt against zero capital? Italy’s like Greece’s like many other and perhaps all other sovereign, the main problem is not losing that status but having been awarded it. 

And even if your 0% risk weight would be based on the nation being able, in nominal terms, to repay 100% of its debt, using the printer, the hard truth for Italy, and for all other eurozone countries is that though eurozone investors holding sovereign debt denominated in euros have the right to consider holding assets in their domestic currency, the eurozone sovereigns who owe such debt do not have  an absolute right to consider they owe it in their domestic currency.

In a 2002 Op-ed titled “The Riskiness of Country Risk” I wrote, “If the risk of a given country is underestimated it will most assuredly be leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line.” That, which hit Greece, now awaits Italy, courtesy of EU.

Sir, it is not obsessive me again. September 2013, in FT, Jens Weidmann, the president of the Deutsche Bundesbank begged, “Stop encouraging banks to buy government debt”. What has EU done about that? Nada! 

Münchau ends with “The eurozone’s dysfunctionality has many origins. It would be unfair to blame it all on Italy. The rise in Italian spreads is evidence that the eurozone crisis never ended. It just fell dormant for a while.”

That is entirely correct, the saddest part though is that the challenges posed by the euro were known, from the get-go.

Sir, as I’ve told you many times before, it is truly mind-boggling how in all the overheated Brexit/Remain discussions that divide Britain, so little attention has been given to the EUs own very delicate conditions.

@PerKurowski

October 28, 2018

Those who fell for the “We will make your bank systems safer with our risk weighted capital requirements” populism should not throw the first stone

Sir, Martin Wolf reviewing three books related to the rise of populism writes “Populist forces are on the rise across the transatlantic world … It may also prove to be a historical turning point, away from liberal democracy, global capitalism, or both.”“The price of populism” October 27.

Indeed, but to me that started some decades ago when bank regulators, as if they where clairvoyants, told us they could make our banks systems safe by imposing risk weighted capital requirements on banks. “Wow, risk-weighted, that’s sure scientific!” 

Sir, if that’s not populism what is? The world, FT and even Martin Wolf fell for it, lock stock and barrel.

Referring to Robert Kuttner’s “Can Democracy Survive Global Capitalism?” Wolf agrees when Kuttner mentions the “incompetent deregulation of finance, especially the growth of short-term cross-border capital flows and the plethora of regulatory loopholes.”

Really? When regulators allowed with Basel II to leverage 62.5 times with assets human fallible credit rating agency have assigned AAA to AA rating, what more loopholes do you really need?

Kuttner also argues against “the disastrous counter-revolution of the 1980s and the relaunch of deregulated capitalism” NO! What “deregulated capitalism” can there be when regulators assign a risk weight of 0% to the sovereign and one of 100% to the unrated citizens? That Sir is regulated crony statism.

@PerKurowski

October 27, 2018

What could “megaprojects” have taught us about the EU and the euro?

Sir, Tim Harford, with the help of Bent Flyvbjerg, “perhaps the world’s leading authority on ‘megaprojects’”, analyzes Brexit “What megaprojects can teach us about Brexit” October 26.

It is a useful exercise though I keep on being surprised by how little attention is given to other closely related megaprojects such as that of the European Union and the euro. 

A complete Brexit project should analyze the costs for Britain of EU not solving the much-ignored challenges the euro poses to EU, as these could be huge. Anyone proposing a Remain, should at least try to get a clear answer from EU on what it intends to do to make absolutely certain the euro will not bring EU down, or if that happens that at least non-euro members are not called to share in its costs.

I have no idea if the EU/euro project was “prepared thoroughly”, without “well-known cognitive biases”, or if it was carried out by “an experienced team”.

But when it comes to “try to break a large project into smaller, standalone chunks, so that the failure of one is not a failure of everything” clearly that’s not the case here, since the failure of the euro could quite likely bring the EU down.

The “everyone having an incentive to make things move smoothly” is doubtful too. Surplus countries find it easier to live with a euro weakened by deficit countries, though that does not work the other way round.

With respect to having an early warning system, so problems can be spotted and fixed before they grow, I seriously doubt it exists. Especially since EU authorities seriously compounded any euro challenges with statist “Sovereign Debt Privileges”, that which assigns a 0%capital requirements for banks when holding eurozone’ sovereign debts denominated in euros... a currency that in most generous terms could qualify as quasi domestic.


@PerKurowski

October 26, 2018

Paul Volcker warns public administration training is no longer on universities’ radar. Neither seems conditional probabilities and Bayes’ rule to be

Sir, interviewed by Gillian Tett, Paul Volcker’s tells her, “I would like my legacy to be some attention to public service. When I grew up good government was a good slogan. But now the phrase ‘good government’ is a mockery [and] universities have effectively abandoned practical public administration training, focusing instead on ‘policy’",“Volcker sets a challenge for the next generation” October 26. 

And Ms. Tett laments, “Few students want to make the type of financial sacrifices that Mr Volcker did for many decades, in the name of public service”

That concern has great merits, especially because the alternative would be to see our public service posts filled with experts in negotiating what crony statism could have to offer.

The Paul Volcker as Fed chair in the 1970s crushing inflation was a hero of mine. Unfortunately I woke up to the fact he helped doom to failure our banking system.


“On September 2, 1986, the fine cutlery was laid once again at the Bank of England governor’s official residence at New Change… The occasion was an impromptu visit from Paul Volcker… When the Fed chairman sat down with Governor Robin Leigh-Pemberton and three senior BoE officials, the topic he raised was bank capital…

Adequate capital – the bank’s buffer against bankrupting loss- was the keystone of a central banker’s mission to uphold financial system safety and soundness.

They literally wiped the blackboard clean, then explored designing a new risk-weighted capital adequacy for both countries… 

It included… a five-category framework of risk-weighted assets… It required banks to hold the full capital standard against the highest-risk loans, half the standard for the second riskiest category, a quarter for the middle category, and so on to zero capital for assets, such as government securities, without meaningful risk of credit default.”

That led to the Basel Accord, Basel I in 1988. And of course, setting the capital requirements for the banks based on the risks that bankers cleared the most for, credit risk, had to dangerously distort the allocation of bank credit to the real economy. As I say over and over again, any risk, even if perfectly perceived, will cause the wrong actions if excessively considered.

Suffices to say that 100% of the assets that caused the especially large 2007-08 crisis were assets that, because they were perceived as especially safe, generated especially low capital requirements for the banks.

When I consider the total silence by universities on the consequences for the stability of our banking system and for the dynamism of our economies produced by the risk weighted capital requirements for banks, I am also saddened.

Universities, like Harvard Business School, do have “Conditional Probabilities and Bayes’ rule” on the curriculum. Could it be that professors are kept too busy preparing these courses so to have time to look out at what’s happening in the world? Or could it be their students, like Paul Volcker, never understood them.

Sir, wake up! When hubris filled besserwisser regulators tell you: “We will make your bank system safer with our risk-weighted capital requirements”, as if they were great clairvoyants, and you believe them, you have fallen for some pure, unabridged and very dangerous populism

The risk weighted capital requirements for banks guarantee especially large exposures, to what’s perceived as especially safe, against especially little capital, which dooms bank systems to especially severe crises.

PS. If regulators want to use risk weighted bank capital requirements, these should be based not on the credit risk of assets per se, but on the risk for the bank system the assets pose, conditioned on how risks are perceived and acted on by bankers. Who has the power to tell them so?

@PerKurowski

October 25, 2018

Italy’s mostly domestic debt is denominated and must be served, in a mostly foreign currency, the euro.

Sir, Isabelle Mateos y Lago informs that “the bulk of sovereign debt is owed to Italian residents rather than eurozone governments.” “Greek debt crisis echoes resound in Italy’s face-off with Brussels” October 25.

EU’s authorities assigned to all sovereigns using the euro, by means of something called “Sovereign Debt Privileges”, for purposes of the risk weighted capital requirements for banks, a 0% risk weight

The only way one could foreseeable defend such outright statist idiocy, is with the argument that nations are always able to nominally pay their debt by printing themselves out of too much debt. Unfortunately these euro nations do not have their own euro-printing machine.

The challenges with the adoption of the euro twenty years ago were immense and surely known by many. Myself, far away from Europe, in Venezuela, in November 1998 published an Op-Ed titled “Burning the bridges in Europe”. In it I wrote: 

“The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. 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.”

So here we are with mindboggling little having been done to solve the euro challenges. Pushing more debt on needing sovereigns basically just kicked the can containing the euro’s problems down the road.

Mateos y Lago concludes: “Italy is too big and strong to be pushed around. So Italians will decide their own fate. The others should redouble efforts to survive this potential wrecking ball. This means adopting European Stability Mechanism instruments that would allow near instant access to OMT to well-run countries suffering from contagion, and provide some form of collective insurance against bank runs for institutions that meet agreed criteria” Indeed but that is again just pushing the euro challenge forward upon the next in line.

That, to me, sounds just like “Let’s kick the euro-problem can down the road again!”

Sir, as I’ve told you many times before, it is also mindboggling how in all the overheated Brexit/Remain discussions, so little attention has been given to the EUs very delicate conditions

@PerKurowski

Is Italy’s 0% risk weighted sovereign debt in euros really denominated in their own currency? NO!

Sir, on the eve of the euro, November 1998, in an Op-ed titled “Burning the bridges in Europe” I wrote: “The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. 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.”

Now you write: “On Tuesday the European Commission, taking a step without precedent in the euro’s 20-year life, demanded that Italy should re-submit its 2019 budget” “Roman theatre clashes with the EU rule book” October 25.

EC’s demand is the direct consequence of Italy no longer possessing the escape valve that a devaluation of their lira used to signify. Not only that. As Italy’s debt is no longer denominated in liras, it will not really have the domestic “benefit” of inflation in their own devalued currency. It is now supposed, like Greece, to serve its debt in euros partly made stronger, by surplus countries like Germany. 

To rub salt into the wound, EU authorities, the European Commission, for the purpose of the risk weighted capital requirements for banks, by means of something known as “Sovereign Debt Privileges” or “Equity Capital Privilege”, assigned a 0% risk weight to Italy, which of course had to doom it to unsustainable public debt.

Sir, it is mindboggling how little EU has done to really confront the challenges posed by the euro, those that if unresolved will bring the EU down.

Similarly, it is mindboggling how in all overheated Brexit/Remain discussions, so little attention has been given to the EUs very delicate conditions. How would history recount if the day after Britain has capitulated handing over its Remain, the EU would break up?

Sir, again, I am strongly in favor of the European Union, but not a Banana Union run by eurocrats whose children or grandchildren do most certainly not know how to sing the European Union’s anthem, and if they did, would never put as much enthusiasm into it as Sofia Goggia did when singing her Italy’s national anthem at the Winter Olympics of 2017

@PerKurowski

October 24, 2018

It suffices for one single nation to set a high tax on carbon emissions and share out its revenues among all its citizens, to really begin saving our pied-a-terre.

Sir, Martin Wolf, whether it is true or not, is absolutely correct calling out: “It is five minutes to midnight on climate change”. We have no right to ignore that threat, even if its possibilities were low. “Inaction over climate change is shameful” October 23.

Wolf asks and answers: “So what needs to change? Net global CO2, methane and nitrous oxide emissions would need to fall to zero” though he also observes. “This is very unlikely to happen. That is no longer because it is technically impossible. It is because it is politically painful.”

It should not be! If only one nation went ahead and placed a big tax on carbon emissions, and shared out all resulting tax revenues equally, unconditionally, among all its citizens that would be a game changer… many would be politically pressured to jump aboard saving the planet that way.

Why does it not happen? Quite simply, the redistribution profiteers, those who profit from negotiating conditions, won’t touch with a ten feet pole an unconditional pay like this, less it spreads to other areas of their franchise, for instance by means of a Universal Basic Income.

Do I know? I come from Venezuela where nothing similar to its current tragedy would have happened had its oil revenues been shared out equally to all Venezuelans, and yet that possibility is rarely mentioned by the opposition, because there’s always an infinite pool of aspirants to be the next redistributors on turn.

Paris Accord? To me it was just a great photo-op for redistribution and fight against climate change profiteers that would do little to improve the chances for my grandchildren to live better.

More than a year ago the Climate Leadership Council proposed a carbon tax along the lines of what I describe here… seemingly they were silenced!


@PerKurowski

October 23, 2018

Most of those who either preach or negotiate free trade are just like a Peeping Tom in a nudist camp.

Sir, Alan Beattie, referring to the possible escalation of trade wars writes: “At the time the WTO is most needed, its failings become ever more manifest. Without reform, the organization itself will suffer severe, possibly fatal, collateral damage from the US-China struggle” "A global trading system under fire” October 22.

Beattie also quotesPascal Lamy, a former head of the WTO: “Whether we like Trump or not — and I do not like Trump, I think he must be credited with one thing, which is to have put this issue of WTO reform on the table.”

Having been busy denouncing failed and dangerous bank regulations, I have not followed WTO for more than a decade but, back in 2006 and 2007, I remember Grant Aldonas, Fred Bergsten and Martin Wolf already opining strongly on the need for WTO to reform.

The reforms requested were not only about efficiency… they were about the real core of free trade.

For instance Grant Aldonas held that the success of any reforms, depended on “WTO negotiators recognizing where the conventional mercantilist approach has taken them [so as to] turn around, head back up the road and chart a new course to achieve the development goals that were their original destination” “Why trade negotiators need driving lessons” May 3, 2006.

In a letter, I agreed stating “Currently trade negotiations, instead of opening the doors to the greener pastures we all wish for, feels more like someone corralling you in, to brand you.”

Grant Aldonas later also suggested a “plurilateral agreement among all WTO members willing to move directly to free trade on a global basis”, “A fresh free trade agenda for Doha”, July 13, 2007.

Again I agreed: “Just like in a nudist camp, we need to separate the real nudists from the Peeping Toms. Only this would allow us to conform a true and honest free trade core. It is clear that many of those who profess a belief in free trade fake it, since how could you otherwise explain the sort of perverse satisfaction many show from entering into negotiating processes that hinders the free trade from really advancing. The true spirit of free trade does not stand a chance against these saboteurs and who are simply too scared of taking off their protections, but want to enjoy the view anyhow.”

When Martin Wolf in April 2007 opined “If free trade is really as good as we say it is, then why should we negotiate about it”, I responded: “Indeed,you do not go to a nudist camp to play strip-poker!”

Sir, most of those holier than thou free-traders bashing President Donald Trump for imposing restrictions on trade, are just like a Peeping Tom preaching the merits of nudity, for other.

WTO bureaucrats also help make WTO inutile, as a result of many of them being engaged, primarily, in the protection of their own turf.

Protectionism comes in all colors and shapes. Those tariffs and subsidies imbedded in the risk weighted capital requirements for banks, are many times more costly to the world than any trade tariffs Trump can come up with.

PS. I myself must confess that, even though I am in principle all for free trade, I often find myself worrying about that all deficits and surpluses are not made equal, some are better, some are much worse.

@PerKurowski

October 21, 2018

Allowing banks to hold sovereign debt against the lowest capital is evil, as it dooms nations to unsustainable levels of public debt.

Sir, Miles Johnson, Kate Allen and Federica Cocco report “Italian bank shares were hit yesterday after the Fitch credit rating agency said banks’ balance sheets were under pressure because of their exposure to Italian government debt.” “Italy’s central bank warns of slowdown” October 21.

Here we go again!

In a 2002 Op-Ed titled "The Riskiness of Country Risk I wrote": “What a difficult job for those assigning credit ratings to sovereigns! If they overdo it and underestimate the risk of a given country, the latter will most assuredly be inundated with fresh loans and will be leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line. If on the contrary, they exaggerate the country’s risk level, it can only result in a reduction in the market value of the national debt, increasing interest expense and making access to international financial markets difficult. The initial mistake will unfortunately turn out to be true, a self-fulfilling prophecy. Any which way, either extreme will cause hunger and human misery.

In his book The Future of Ideas: The Fate of the Commons in a Connected World” Lawrence Lessig maintains that an era is identified not so much by what is debated, but by what is actually accepted as true and so is not debated at all. In this sense, given the risk that the perceived country risk actually becomes the real country risk, it is best not to assign an AAA rating blithely to credit rating agencies—perhaps not even a two-thumbs-up.”

In 2004, in a letter published by FT I asked “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?” 

Then by means of the “Sovereign Debt Privileges” or “Equity Capital Privilege” enacted by EU authorities, Greece was assigned, for the purpose of the risk weighted capital requirements for banks, a 0% risk weight... and consequently it went down the tubes.

A 2017 paper by Dominik Meyland and Dorothea Schäfer titled “Risk weighting for government bonds: challenge for Italian banks” and produced by the German research institute DIW Berlin states: “Although banks are required to document their equity capital for loans, corporate bonds, and other receivables, they are currently exempted from the procedure when investing in government bonds: they enjoy an “equity capital privilege.” As part of the Basel III regulatory framework redraft, the privilege may be eliminated in order to disentangle the default risks between sovereigns and banks. The present study examines how much additional equity capital the banks of the euro area’s major nations would require if the equity capital privilege were eliminated. At nine billion euros, the estimates show the highest capital requirement for Italian banks… The primary reason for this is that Italian banks hold relatively large amounts of Italian government bonds” 

That paper was written when “Italian government bonds had a Fitch Rating of BBB+, yielding a risk weight of 50 percent based on the [Basel II] standard approach.”On August 31 Reuters reported “Fitch Ratings on Friday cut Italy’s sovereign debt outlook to ‘negative’, citing expectations that the new coalition government’s fiscal loosening would leave the country’s high levels of debt more exposed to potential shocks.” If Italy’s rating drops further, those capital requirements would only increase… or worse losses having to be recorded.

I wonder if EU will put the blame solely on Italy as they did with Greece, ignoring they caused the tragedy with their “Sovereign Debt Privileges”.

The DIW Berlin paper also states: “German banks also exhibited a strong home bias, but German government bonds have an AAA rating. Unlike the Italian banks, the German banks’ home bias is thus inconsequential regarding the banks’ capital needs.”

So I would say that Germany is also on the same 0% sovereign risk weight road that took down Greece, and sadly, perhaps Italy too.

When will they ever learn? 

@PerKurowski

October 20, 2018

John Kenneth Galbraith would probably include Alan Greenspan among men of wisdom that missed the point.

Sir, Robert Gordon, reviewing Alan Greenspan’s and Adrian Wooldridge’s “Capitalism in America: A history” writes: “Three themes are highlighted — productivity as the measure of economic progress; the “Siamese twins of creation and destruction” as the sources of productivity growth; and the political reaction to the consequences of creative destruction.”, “After the gold rush”, October 20.

I have not read that book yet, I will; creative destruction plays absolutely an important role in the acceleration and sustainability of growth.

I do not know Adrian Woodridge, but, when it comes to the former Fed Chairman Alan Greenspan, I have an inkling that if John Kenneth Galbraith was still around, he would suggest Greenspan does not have all what it takes to write that book.

Let me explain that by quoting from Galbraith’s “Money: Whence it came where it went” 1975: “For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.”

Alan Greenspan clearly fits in with those “Men of economic wisdom” (of the East) who are distasted by unstable banking. To make banks stable, he supported risk-adverse risk weighted capital requirements, much lower for what’s perceived safe (the present) than for what’s perceived risky (the future). 

Sir, and if one is to tellthe real “full, epic story of America's evolution from a small patchwork of threadbare colonies to the most powerful engine of wealth and innovation the world has ever seen”; which is how this book is being promoted, one would need to begin with the willingness of its people to take risks.

What would have happened to America if banks with risk-weighted capital requirements had met its immigrants? Probably that imagined 1620 meeting in Davos about the future world, in which “one region goes unmentioned: North America. The region is nothing more than an empty space on the map” would not have found its way into this book.

The saddest part of all this is that our current generation of central bankers and regulators, like Alan Greenspan, those who prioritized bank stability over growth, as if these two aspects could be separated, anyhow did it totally wrong. With their risk weighted capital requirements, they only guarantee that banks will end up with especially big exposures, against what’s perceived as especially safe, against especially little capital; something which can only cause especially big crises, like that of 2007-08.
PS. Galbraith’s book also explained that, de-facto, regulators had also decreed inequality

PS. Gordon writes about “millions of immigrants being drawn in from Europe as the ever-expanding railroads, enjoying massive government subsidies in the form of free land, in turn subsidised the new arrivals so that they would populate the west.”.  I am not sure that amounted to “massive government subsidies”. If not zero, most of it must have been extremely low valued land. It was those migrants who with their sweat, inventiveness and willingness to take risks built up the value of that land.

PS. Gordon complains the book has “only a page or two reckons the human cost of underpaid labourers, including the consequences of malnutrition [and on] labour unrest”. That reads just like political correctness’ flag waving; and belief in that if only the task of development was assigned to the right kind of central planners, his kind, it would be achieved in a nice and fair way, with no sufferings and no inequality.

PS. In Venezuela, during a conference, 1978, forty years ago, John Kenneth Galbraith autographed “Money” for me. Mine was the only one he signed explaining he did so because it was a pocket book and much underlined  His book inspired the first Op-Ed that I wrote, more than twenty years ago.
@PerKurowski

How naïve were we when regulators told us “We will risk weigh the capital requirements for banks to make these safer for you”?

Sir, Simon Kuper in reference to Brexit writes “It’s hard now to fathom how naive we were in 2016. I thought…you couldn’t just stick a false slogan on your campaign bus, could you? “Trust, lies and videotape” October 20.

Sure you could! Like when or bank regulators told the world that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe, and the world, including Simon Kuper, and the Financial Times, believed that to be true.

Kuper holds the popular gold standard of truth being, “I saw it with my own eyes.” Well not in this case! 100% of the assets that caused the 2007-08 crisis were assets that because these were perceived as safe, allowed banks to hold especially little capital, and that has yet to even be formally noticed.

Kuper quotes Umberto Ecco: “The genuine problem . . . does not consist of proving something false but in proving that the authentic object is authentic.”

Yes, like the problem I have had surpassing that seemingly unsormountable barrier of “what is risky is risky”, in order to warn regulators that what is “safe”, is even more dangerous… at least to our bank systems.

@PerKurowski

October 19, 2018

The risk premiums for a suspect of human rights violating nation will increase, which, sadly, will also attract investors

Sir, Gillian Tett, with respect to how business should or could behave in cases of human rights violations, like that of Khashoggi, if confirmed, writes: “since western businesses are scrambling to maintain their investments there at a time of rising Sino-American tensions. “What will we do the next time that the Chinese toss dissidents in jail or clamp down on local journalists?” asks one chief executive. The answer is not clear.” “The Khashoggi case puts US businesses in a moral bind”, October 19.

How much has the risk premiums required by anyone wanting to invest in Saudi Arabia gone up after the Khashoggi incident, and after how Saudi Arabia reacted against Canada when its Foreign Affairs Minister Chrystia Freeland tweeted concerns about the news that several social activists had been arrested in Saudi Arabia? These must have increased a lot, and an initial public offering of the Saudi oil giant Aramco is rumored cancelled.

That costs of course the human rights violating nation a lot… but those higher risk premiums also attract… as we can notice when a Goldman Sachs finances a notorious human rights violating regime like Venezuela’s Maduro’s.

The answer to the chief executive’s what to do question, should have to include “what our shareholders have mandated us”. Unfortunately too many shareholders also turn a blind eye to ugly realities, when for instance a Goldman Sachs announces record returns on equity.

What do we lack? Perhaps the will of a responsible elite that is willing to shame those who behave in a disgraceful manner, in a completely apolitical way. We need a society whose members would not invite Goldman Sachs’ Lloyd Blankfein to have tea at their homes. 

Sir, I have not been able to find the reference to it on the web but, some years ago, in Swedish television, I remember having heard something about a Swedish king who said he feared more the opinions of Stockholm’s high societies ladies than Russia. 

@PerKurowski

October 18, 2018

The dangers of the unknown unknowns are greater than those of the known unknowns.

Sir, Martin Wolf asks, “Is it possible to know the state of the UK public finances under present conditions?” He answers “No. The unknowns are too great.” “Some ‘known unknowns’ about the UK economy”, October 19.

Indeed, but to me, the most dangerous unknowns for the UK, and for much of the rest of the world, are the “unknown” unknowns. 

Like how much of the savings for the future, of those who are the least able to manage major upheavals, has been invested in houses; those homes that because of so much preferential finance increased their prices so much, that they were turned into also being risky investment assets?

Houses are good investments… until too many want to convert them simultaneously into main-street purchasing capacity.

Like how much of the illusion of public debt sustainability is solely the result of preferential regulations, like the Basel Accord of 1988 decreeing a 0% risk weight to sovereigns and a 100% risk weight to citizens?

Any sector given more preferential access to credit than other is doomed to unsustainable debt… just like Greece was doomed by the 0% risk weight some yet unknown EU authorities awarded it.

Sir, when compared to these in general unknown unknowns, the known unknowns, like Brexit or trade wars, are just peanuts. 

@PerKurowski

Artificial intelligence could help humanity to overcome some of its very human frailties.

Zia Chishti, the chairman and chief executive of Afiniti holds that AI is especially good at “the identification of patterns in complex data.” “Do not believe the hype about artificial intelligence” October 18.

I agree but sometimes we also need help identifying what we humans for some reasons are unable or find hard to see in very simple data. 

That’s why I have often tweeted out asking for IBM’s Watson’s (or Goggle's DeepMind) help, in making bank regulators understand that their risk weighted capital requirements for banks have gotten it all wrong. Had they really looked at simple data on bank crises, they would have immediately seen these were never caused by assets perceived ex ante as risky, but always by assets that when booked by banks were perceived as especially safe.

Perhaps the safe-is-risky and the risky-is-safe might just be a too hard concept for humans to swallow and act on. If that’s the case, in AI’s assistance we trust.


PS. Here is an aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

Sometimes, quite often, a government’s help costs you more than it is worth

Sir, Sarah Gordon with respect to the possible consequences of Brexit for small business writes: “The British government has failed to provide the support that is needed” “Aloof state abandons UK small businesses to their Brexit fate” October 18.

Since any government assistance way too often goes hand in hand with having to waste your time, or your money paying their crony consultants for a lot of tasks not necessarily relevant to the problem at hand, I’m not really sure small businesses are here net losers as a result of that lack of support.

Besides what’s to be expected from a government that allows banks to hold much less capital when lending to the sovereign and financing house purchases, than when lending to small businesses?

@PerKurowski

October 17, 2018

Our banking systems have been made especially fragile, because of especially bad bank regulations.

Sir, Martin Wolf writes “The world’s economy and financial systems are fragile … the most important source of fragility is political… In country after country, populists and nationalists are in, or close to, power. Salient characteristics of such politicians are myopia and entrenched ignorance. Inevitably, they spread uncertainty.” “Politics puts the skids under bull market” October 17.

In April 2003, as an Executive Director of the World Bank I delivered a statement that contained the following: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

One of those “Best Practices” has been the risk weighted capital requirement for banks. These give banks incentives to create especially large exposures to what is perceived or decreed as especially safe, against especially little capital; making our banks, and the sector lending thereby favored, like sovereigns and houses, extremely fragile.

Populism? Sir, few things as brazenly populists as “We will make our bank systems with our risk weighted capital requirements because we sure know about risks. 


But Wolf refuses to ask bank regulators about what they were thinking when they assigned a meager 20% risk weight to assets that because rated AAA represents great dangers to bank systems, compared to a whopping 150% for the so innocous below BB- rated. Sir, could it be you are not paying Wolf enough?

PS. In a similar vein during the interview Mme Lagarde said, “In IMF’s view capital flow management measures should: not be first order of priority, only be used in exceptional circumstances, not be a substitute for macroeconomic and macroprudential policies.”

So why does IMF keep mum about the risk weighted bank capital requirements? In a letter FT published in November 2004 I wrote: “our bank supervisors in Basel are unwittingly controlling the capital flows in the world.” Could it be that IMF still does not understand that that regulation distorts, controlling credit flows in favor of the “safe” present and against the “risky” future

PS. Ref the same interview: Trade protectionism? What neo-Bretton Woods Conference will be needed to help us get rid of bank regulations made to protect banks but that only endangers bank systems?

PS. Ref the same interview: Balance sheet vulnerabilities. Are not the consequences of central banks huge liquidity injections, with QEs, especially for emerging countries, precisely the same as those of the 1974 to 1981 recycling of oil revenues surpluses?

PS. Ref the same interview: Is the eurozone crisis over? “No!” says Mme Lagarde. After 20 years way too little has been done about solving the challenges of the euro and that, if not solved could bring EU down… and still Wolf categorizes his homeland Britain as “my idiotic country” because of Brexit.

PS. Ref the same interview: With respect to Greece, not a word was said about the EU authorities 0% risk weighting of Greece, which doomed it to its excessive public indebtedness.

@PerKurowski

Many “independent” central banks, like the Fed and ECB, are behaving as statism cronies

Sir, Michael G Mimicopoulos, when commenting on your editorial “The long bull market enters its twilight period” (October 13), writes“The debt of non-financial companies in the US, which has risen to 73.5 per cent of GDP, an all-time high… Companies have been borrowing money to buy back their own stock, to increase earnings per share rather than pay down debt.” “Fed should be viewed against its record” October 17.

Absolutely and that has been going on in front of Fed’s eyes; just like banks have been shedding assets which require them to have more capital, in order to show better capital to risk weighted asset ratios.

Fed independence? Central banks that approve of a 0% risk weighting of their sovereign with a 100% for citizens, keep interest rates ultralow, and launch quantitative easing programs purchasing loads of sovereign debt, can hardly be called independent, much more statism cronies.

@PerKurowski

October 16, 2018

If only bank regulators had taken their clues from fixed odds betting terminal regulators.

Sir, Henry Mance and Camilla Hodgson write about the reduction of The government announced last year that it would reduce “the maximum stake on fixed-odds betting terminals — such as roulette — from £100 to £2 to tackle problem gambling.” “Problem gambling shake-up set to be brought forward” October 15.

Of course that will operationally distort fixed odds betting terminal playing, slowing it down, but by keeping the odds as designed for the game, meaning every bet having exactly the same probability adjusted payout, it will not alter the nature of it. 

We can only wish our current bank regulators had used a similar route because these, by allowing banks to leverage assets differently based on their perceived (or decreed) credit risk, actually determined that banks would obtain higher risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky… and that has clearly distorted the whole nature of banks, when fulfilling their expected role of allocating credit efficiently to the real economy. How long would the game of roulette have survived such regulations?

In terms of betting on horses at the racetrack that would be like handicap officials taking off weights from the stronger and faster horses and placing these on the weaker slower ones. How long would horseracing tracks survive such distortions?

In terms of our ordinary golf that would be like handicap officials giving more strokes to the better players than to lousy players like me. How long would our golf clubs survive such distortion?

What’s going to happen to our bank systems? If these regulations persist, they are going to implode on some especially excessive exposures, to what is especially perceived (or decreed) as safe, against especially little capital. No doubt about it!

@PerKurowski

October 15, 2018

IMF, what are tariffs on billions of trade, when compared to tariffs and subsidies on trillions of bank credit?

Sir, Chris Giles, James Politi and Stefania Palma write about concerns during recent IMF meetings in Bali, “With the world’s two largest economies slapping tariffs on $360bn of goods so far this year, and possibly more to come” “Geopolitical tension casts pall over annual IMF meeting” October 15.

Last year I read somewhere that the just world’s 10 largest banks combined had over $25 trillion in assets. So when I think on how much the allocation of those assets might be dangerously distorted by the risk weighted capital requirements, I find it hard to understand that “the world’s two largest economies slapping tariffs on $360bn of goods so far this year”, was of so much concern during the recent IMF meetings

Sir, get it, the risk weighting of banks’ capital requirements, for bank protection purposes, translates de facto into tariffs and subsidies that will steer the allocation of bank credit.

The damage, by promoting banks way too much to be into banks “safe” AAA rated securities, residential mortgages and loans to sovereigns, while de-incentivizing loans to “risky” entrepreneurs and SMEs, is immensely worse than what the current trade-wars, sort of Lilliputian vs. Blefuscu in comparison, could produce.

Sir, again, for the umpteenth time, what the risk weighted capital requirements for banks guarantee is: 

Especially large exposures to what’s perceived as especially safe, against especially little capital, which dooms or bank system to especially severe crises. 

Especially low exposures to what is perceived as risky, like loans to entrepreneurs and SMEs, which dooms our economies to weakness and to not being able to reach their potential.

@PerKurowski

True elite should fight odious polarization and not allow itself to be painted into a corner by the neo-parochialism of political correctness.

Sir, Rana Foroohar writes: “there’s research to show that elites are less likely to part with their biases than the ordinary person. This is probably because they believe themselves to be better educated and informed than the masses, which may well be true. “The elites are ignoring deglobalisation” August 15.

If we include bank regulators as part of the elite (they would hate it if we don’t), these do indeed find it very hard to part with their biases. It is sad because they’ve gotten it totally wrong.

You ask them: Why do you want banks to hold more capital against what is especially dangerous for our bank system because it is perceived or decreed as safe, than against what is perceived risky and therefore poses no threat? Their eyes glaze over and they never answer, except for when they make it as if they’ve heard a coTmplete different question.

The direct consequence of those risk weighted bank capital requirements is plain awful. It only guarantees, especially large exposures, to what’s perceived as especially safe, against especially little capital, dooming our bank systems to especially severe crises. 

Forrohar asks: What is the next big thing the global elite is missing?

My answer would be it is missing out way too much on how polarization and redistribution profiteering, among other empowered by low cost and far reaching social media, is creating odious social divisions that will tear it to pieces.

What could de elite do? To begin with, find ways to restrict those peddling opinions for money (donations). Whenever something exploitable in terms of polarization happens, my inbox is swamped by donation requests to allow the favored anti-devil-champion of turn to enter into battle and save us.

Recently Lawrence Summers in “I discovered the rest of America on my summer holiday” described America’s small communities’ parochialism with “The conversations we overheard hewed close to local matters.”

In the discussion of the article on the web I commented “Political correctness, that which only allows focusing on small-predefined sections of an issue, rather than allowing considering its wider context, is a living example of a neo-parochialism you find in universities and big cosmopolitan cities”

Sir, a true elite does not allow itself to be painted into a corner by political correctness.


@PerKurowski

October 13, 2018

What has most made houses unaffordable for many is having made these artificially affordable for many.

Sir, John Dizard quotes and comments Robert Dietz, chief economist at the National Association of Home Builders with: “Affordability is at a 10-year low.” It is not just the tariff-driven double-digit rise in the cost of wood. “We have suffered labour shortages for the past [few]years. Now the builders say that [land approved for building] is low.” “Bad news for housebuilding recovery as America loses its free lunch from world”, October 13.

That might bear some influence bit let us be very clear, what has most made houses unaffordable for many has been all that preferential financing to make house purchases affordable to many, which turned homes into investment assets and increased the prices of houses and the wealth of those who own houses.

For example, should banks have to hold the same capital against “safe” residential mortgages that they need to hold against loans to “risky” entrepreneurs house prices would be much lower...(PS. But there surely would be more jobs to help allow the purchase of houses at its lower prices)

Sir, a monstrous real estate crisis is being fabricated by regulators who can’t come to grips with the simple fact of life that if you blow too much credit into a market, you will create a bubble that, sooner or later, will explode L

@PerKurowski

What’s the safest way to fight climate change: by centralized planning or through the market?

Sir, Tim Harford writes: We should do more to encourage innovation that attacks the climate change problem… The most obvious first step (among several worth trying) is a stiff tax on carbon dioxide emissions” “Let’s innovate a way out of our climate crisis” October 13.

I agree 100% with that. The real question though is what is to be done with the revenues of such stiff tax? There are different options. 

The first to allow governments to manage these, setting it up for good results, but also a quite likely having it much captured by the war-on-climate-change profiteers. 

The second to share out these revenues equally among all citizens, like by helping to fund a Universal Basic Income, and so that it is the market that will take the decisions on what’s to be done.

Of course there are also pseudo market solutions, like those carbon emission permits trading that handed over to speculators, a market in non-transparent carbon emission indulgences.

Sir, I am totally for the sharing out all those tax revenues among the citizens option. That would minimize the distortions, and align everyone’s incentives in the fights against climate change and poverty.

PS. In May 2016 you published a letter I wrote on how to fight the pollution in Mexico City, which was based on these arguments.


@PerKurowski

October 12, 2018

When the tide that turned safe homes into risky investment assets goes out, the wreckage will be horrific

Sir, Paul Mortimer-Lee in his letter “The tide that floated all ships is going out”, October 12, commenting on Martin Wolf’s “How to avoid the next financial crisis” (October 10), writes:“easy money has been pushing on a string as far as inflation is concerned”.

Not really, the problem is that, as I answered Martin Wolf in a letter published by FT 2006, is that when measuring inflation in housing, what is registered on the string is the cost of rental, not the prices of houses.

With low interest rates and especially low capital requirements for banks when financing the purchase of houses; unelected authorities have transformed houses from being safe homes into risky investment assets. When the tide goes out on that, the wreckage will be indeed absolutely horrific.

@PerKurowski

The regulators are responsible for the doom loop between Italy’s heavily indebted public finances and its banks

Sir, David Crow and Rachel Sanderson write: “Filippo Alloatti, senior credit analyst at Hermes, said that [Italian] banks were “super long” on Italian government debt, which accounts for between 13 and 15 per cent of their total assets… Such heavy exposure has revived the spectre of the doom loop, which describes the inextricable link between Italy’s heavily indebted public finances and its banks”, “Italy’s lenders feel heat as doom loop fears return” October 12.

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

And one of the most surprising things for someone like me who plays no formal role in the regulation of banks is why the world did not object to the horrors of banks regulators that, with Basel I in 1988, for the purpose of risk weighted capital requirements, assigned a risk weight of 0% to the [friendly] sovereign and one of 100% to the citizens.

That this regulation that so clearly favors crony statism was introduced a year before the Berlin Wall fell is evidence of how much can go wrong, if we allow unelected officials to engage in groupthink within a mutual admiration club.

Central bankers and regulators around the world have, with their especially low capital requirements against sovereigns, been setting our bank systems up to an especially monstrous crisis, and still they congratulate themselves for more resilient banks.

Just like they have set us up, to an equally especially monstrous disaster in waiting, with their especially low capital requirements for banks financing the purchase of houses; which has transformed houses from being safe homes into risky investment assets.

Central banks have of course made it all so much worse by keeping ultra low interest rates, and pouring huge amounts of QE liquidity on this structurally faulty regulatory fabric.

Our banks have been painted into a corner. What would happen if regulators suddenly announced that the risk weight of the sovereign had to increase from 0% to a meager 1%? 

If Italy goes down the tube will financial authorities lay the full blame on Italy, just as they did with Greece after they doomed it with that odious 0% risk weight?

Sir, you know I feel the Financial Times has kept complicit silence on all this.

@PerKurowski

October 11, 2018

Compared to regulators’ manipulation of bank credit, Libor manipulation is as peanuts as peanuts come

Sir, I refer to Katie Martin’s “Scrapping of Libor benchmark leaves $500bn of bond contracts in limbo”, October 11.


I’ve been on both sides of Libor, as a lender and as a borrower. I have never thought it a precise instrument, but good enough, sometimes you lose, sometimes you win, especially when any implied manipulation is done by speculators who are indifferent to whether Libor is too high or too low. What matters to them is their position in Libor futures, at any time. 

In the long run, for all other Libor dependent, its manipulation ends up in a big wash.

The big hullaballoo around it, and forced search for substitutes, are just a big distraction from the real dangerous manipulations. 

Current credit-risk weighted capital requirements for banks pushes credit towards dangerous excessive exposures to the safer present, and away from what is required by the riskier future. Sir, for both borrowers and lenders, that is an extremely costly manipulation. As less capital allows for larger bonuses, only bankers win.


@PerKurowski

The prime element of a Universal Basic Income is its unconditionality, and that’s why redistribution profiteers hate it the most

Sir, John Dizard titles“Sorry, but the world is not yet ready for universal basic income” October 11, but then he writes an article exposing exactly why we need a Universal Basic Income. Clearly he has not understood the real implications of UBI’s most important principle that of its unconditionality; never to be paid out because you are something different, like in jail.

I came to Universal Basic Income by means of my long fight for having all Venezuela’s net oil revenues shared out equally among all Venezuelans. That would have saved my homeland from its current tragedy. Instead those revenues fell into the hands of odious, besserwisser, corrupt redistribution profiteers… who paid it out generously to themselves and their friends… and with especially bad cheese to the rest of Venezuela.

“UBI…cannot be done within the bounds of the existing social contract in advanced countries.” Absolutely, as long as we allow redistribution profiteers to define those bounds.

Those redistribution profiteers who, circling their wagons in order to defend the value of their franchises, convinced Dizard of that “big tax rises and reductions in other benefits would be needed, even for a modest basic income”. Their most usual tool is using very high figures for that basic income. There is absolutely nothing that would stop advanced countries from beginning by paying out some US$ 200 per month to all its citizens. That would help oil the economy much more than a tax cut.

We urgently need something to help create decent and worthy unemployments in time, before all social order breaks down… and redistribution populists like Hugo Chavez and pals take over. 

@PerKurowski

October 10, 2018

To minimize the next unavoidable financial crisis, get rid of the dangerous risk weighted capital requirements for banks.

Sir, Martin Wolf backs IMF’s Global Financial Stability Report of October 2018 by requiring that “above all we must keep [bank] capital requirements up”, “How to avoid the next financial crisis”, October 9.

No one, except of course those bankers whose bonuses depend a lot on not having to compensate much capital, would argue against banks having to hold more capital. But, after a bank crisis that resulted exclusively from excessive bank exposures to assets especially perceived as safe, and that therefore regulators allowed banks to hold against especially little capital, it should be clear that even more important than more capital, it is to get rid of the risk weighted capital requirements for banks, those which so distort the allocation of bank credit.

Wolf writes: “The pre-crisis world was one of globalisation, belief in markets and confident democracies” Really? If so that’s because way too few knew what was happening.

“Confident democracies” In 1988, with the Basel Accord, one year before the Berlin Wall fell, bank regulators, without due consultations, smuggled in risk weights of 0% for the sovereign and 100% for the citizens. Sir, no matter how you see it, that is statism imposed by unelected autocrats that has nothing to do with democracy.

“Belief in markets” When regulators, with Basel II of 2004, assigned a risk weight of 150% to what was rated below BB- and only 20% to what was rated AAA to AA, they very clearly, stated, bankers don’t see shit, so we must help them out.

Sir, some might take comfort that current figures, even not as good as if the crisis had not happened, are still acceptable. They will soon wake up to the fact that these relative decent post crisis results, come from kicking the crisis can forward, and from the debt-financed anticipation of demand. That can, will soon start rolling back on our children and grandchildren. Great kicking authorities!

PS. Again! Had regulators understood that risk-weighted capital requirements for banks only guarantee especially large exposures, against especially little capital, to what’s perceived or decreed as especially safe, an especially big crisis like that of 2008 would not have happened

@PerKurowski

October 07, 2018

I trust banks and markets much more when regulators keep their hands off.

Sir, I refer to John Authers’ “In nothing we trust” Spectrum, October 6.

Let me give you brief one page version of my story:

1998, in an Op-Ed (in Venezuela I wrote) “In many cases even trying to regulate banks runs the risk of giving the impression that by means of strict regulations, the risks have disappeared…History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”

1999 in another Op-Ed “What scares me the most, is what could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

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

April 2003, as an Executive Director of the World Bank, in a formal statement, I repeated that warning: "Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market"

June 2004, the Basel Committee on Banking Supervision issued Basel II. By means of their standardized risk weights, they allowed banks to leverage a mind-blowing 62.5 times their capital if only an asset carried an AAA to AA rating issued by a human fallible credit rating agencies.

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

After reading an incomprehensible explanation provided in June 2005 by the Basel Committee I have, in hundreds of conferences tried to get the regulators to answer the very straightforward question of: “Why do you want banks to hold much more capital against what, by being perceived as risky, becomes less risky to our bank systems, than against what perceived as safe poses so many more dangers?” I have yet to receive answer.

So we have regulators who still, after a crisis caused exclusively by assets perceived as safe and that therefore banks could be held against less capital, allow especially large bank exposures, to what’s perceived as especially safe, against especially little capital. 

Sir, that dooms our bank system to especially severe crises. Why on earth should I or you trust them?

Sir, in hundreds, if not thousands of letters to you over the last decade, I have also tried to enlist FT in helping me ask that question (one that seemingly shall not be made) and to insist on receiving a comprehensible answer. I’ve had no luck with that either, so, respectfully, why should I trust your motto “Without fear and without favour”?


PS. And this letter does not refer to the horrendous introduction of full fledged statism that happened when with Basel I in 1988 the regulators assigned a risk weight of 0% to the sovereign and one of 100% to the unrated citizen.

@PerKurowski