February 19, 2019

If Germany’s euro debt gets to be redenominated in Deutsche Marks, what would happen to its commercial surplus?

Sir, Kate Allen writes: “German bonds, or Bunds… are the eurozone’s safe asset… the spread against equivalent Italian bond yields to about 2.9 per cent.” “Tail Risk” February 19.

So if Bunds is the Eurozone’s safe asset, how come EU authorities assign it a risk weight that is just the same as all other Eurozone sovereigns’ debts, namely 0%? And this even when they all are indebted in a currency that is not really their own domestic (printable) one.

That 0% risk weight translates into that European banks do not have to hold any capital against debts of the Eurozone sovereigns… a clear subsidy... especially to those sovereigns most remote from earning that 0%.

So, had that not been the spreads of many eurozone sovereigns against Bunds would have been much larger, and in such case many of those sovereigns, like Greece, like Italy, like Spain, like Portugal would have had to borrow less, and would therefore have had to reduce their commercial deficits, reducing by that Germany’s commercial surplus.

Allen opines: “Investors need to put their money somewhere and [if there are not enough Bunds they are forced into substitutes which then rapidly become overloaded and suffer price bubbles.”

Indeed but when we consider that much of that investment money was supplied by ECB buying European sovereign debt, including Bunds, perhaps we should start by looking there before we might add fuel to a dangerous fire.


February 17, 2019

If only regulators had analyzed their risk weighted capital requirements for banks in terms of bets.

Sir, Tim Harford refers to Nassim Taleb, warning of “the ‘ludic fallacy’ — treating the unknown risks of life as though they were the known risks of a game of chance”, “Experimental living beats thinking in bets” February 17.

That is somewhat like when regulators treated the unknown risks in banking and set their risk weighted capital requirements. 

Harford also mentions Annie Duke’s recommendation “that we should always be willing to ask ourselves, ‘do I want to bet on that’ — it’s easy to be overconfident if there are no obvious consequences for being wrong. A bet forces us to think about the odds and the possibility that someone else may know better.”

Oh, if only our bank regulators have asked themselves: “Do we want to bet our bank systems on that what gets an AAA to AA rating, issued by human fallible credit rating agencies, is so safe we should only need to require banks to hold 1.6% in capital against such assets and so allow them to leverage 62.5 times with these?” Had they posed that question, the crisis resulting from excessive exposures to AAA rated securities backed with mortgages to the subprime sector would not have happened.

“We have risk-weighted the capital requirements for banks in order to make our bank system safer.” Someone has either played tricks on them or they are bluffing. The sad part is that so few dare to call them out on it. And, when I do that, many just brush me off with a “he’s just got an obsession”.

Though Harford accepts that “Thinking in bets is a rigorous and admirable habit” for many cases he favors “Thinking in experiments [as that] allows us to learn [and might be] less painful.

In case of bank regulations experiments are not needed. Just go out and look at all the crises and try to find one that was caused by excessive exposures to something perceived as risky when placed on the balance sheets of banks. None! Should that not tell you something about our unwillingness to learn when the lessons are hard to swallow? 

Sir, using Edward Thorp’s real casino risks, in banking, the Basel Committee represents “the crooked dealer” and the risk weighted capital requirements “the poisoned coffee” 

Casino games, like roulette, are all based on offering all possible bets exactly the same expected payout adjusted for their respective probabilities. If it was not so, no casino would survive. So it was in banking, until risk weighted capital requirements offered banks higher risk adjusted return on equity for what was perceived, decreed or concocted as safe (betting on a color), than for what was perceived as risky (betting on a single number). The consequence? Our bank systems will fail especially bad, by building up especially large exposures to what is especially perceived as safe, against especially little capital. The 2008 crisis, and Greece, were just canaries in that mine.

PS. Here is the current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.


February 15, 2019

For social harmony, in our time, we need a big enough and a small enough universal basic income.

Sir, Chris Giles refers to a “1994 OECD study [which] contained a warning of the dangers in store for countries that failed to tackle problems in their labour markets. “It brings with it unravelling of the social fabric.” “Improve employment rates to tackle inequality” February 15.

Giles opines, “Flexibility and social protection is a winning combination for advanced economies. While it does not prevent all employment problems, whether you take a right-of-centre “work not welfare” attitude or a left-of-centre “a hand up not a handout” stance, in general the combination works.”

I agree! An unconditional universal basic income, large enough to allow many to reach up to whatever jobs are available, is “a hand up not a handout”.

And an unconditional universal basic income, small enough so as not allow many to stay in bed, is also “work not welfare”.

So what’s keeping an UBI from being implemented?

To begin there’s not sufficient recognition of the real conflicts, basically a class war, between those who having a job want better pay and those who want a job at any pay.

But, first and foremost, it is those who profit, politically and monetary, on imposing their conditionalties when redistributing tax revenues, who strongly oppose a UBI, since it, naturally, would negatively affect the value of their franchise.

PS. The Chavez/Maduro regimes are clearly outliers among the redistribution profiteers but just as an example I once calculated that the 40% poorest of Venezuela had received less than 15% from the Bolivarian Revolution than what should have been their allotment had Venezuela’s net oil revenues been shared out equally to all. On the other side many of the odious profiteers pocketed many thousand times what should have been their share.


February 12, 2019

A tweet dedicated to all those in FT that write the column of "Tail Risk"

Two tail risks:

The best, that which perceived as very risky turns out to be very safe.

The worst, that which perceived as very safe turns out to be very risky.

Risk weighted capital requirements for banks, kills the first and puts the worst one on steroids.


February 07, 2019

FT, do you really mean it?

FT, do you really mean that if David Malpass becomes president of the World Bank the Asian Infrastructure Investment Bank (AIIB) dominated by China will become a worthier development bank than WBG?

Sir, in “US makes a poor choice for World Bank chief” February 7, you lash out that if David Malpass becomes president of the World Bank, that will lead to a “dysfunctional organisation that will encourage its activity to shift to other development banks, including the Asian Infrastructure Investment Bank.” Really? Has this do to with David Malpass, or has this to do with someone else who is not to your liking?

In support of your doom you mention that Malpass’ “judgment even on economics, his supposed speciality, is wanting. Notoriously, as then chief economist at Bear Stearns, Mr Malpass was blithely confident about the strength of the US economy in 2007 — a year before the global financial crisis hit and his own employer went under” 

Sir, like many he had confidence in those AAA rated securities that SEC, which supervised investment banks in the US, allowed, based on recommendations of the Basel Committee, Bear Sterns to hold against only 1.6% in capital, to leverage over 62.5 times. I have not read much about you judging the regulators’ specialty wanting.

As for the World Bank you argue that its role is “providing global public goods such as managing scarce water supplies, combating pandemics and coping with the effects of climate change.”

No, its role is not to substitute for governments? The World Bank is a development bank, which means, at least in my book, its role is to help and assist financing countries to develop their own capacities to manage scarce water supplies, combate pandemics and cope with the effects of climate change.

Sir, you know I have a concern about the World Bank, namely that it does not object to the current risk weighted capital requirements for banks. I hold that it should, because risk taking is the oxygen of any development.

Who knows, perhaps someone who has seen first hand what happens if you trust what’s “safe” too much to be safe, might be exactly what the World Bank needs.


February 06, 2019

I hope David Malpass, nominated by USA, if confirmed as president of the world’s premier development bank, understands that risk-taking is the oxygen of all development.

Sir, Robert Zoellick writes: “If policymakers overlook the experience of developing countries during the crisis, they are less likely to consider emerging market dynamics, understand developing economies’ sources of resilience and appreciate vulnerabilities” “Who ever runs the World Bank needs a plan for emerging markets” February 6.

Of course no one should overlook experiences obtained during crises but, focusing excessively on these, puts a damper on the potential growth between the crises.

In his book “Money: Whence it came, where it went” (1975), John Kenneth Galbraith, referring to the accelerated growth experienced in the western and south-western parts of the United States during the 19thcentury, argued that it was the result of an aggressive banking sector working in a relatively unregulated environment. “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

For instance when banks are required to hold more capital when lending to their “risky” entrepreneurs, than when lending to their “safe” sovereign, as current Basel regulations mandate, that is bad enough in developed countries, but, in developing/emerging countries, it is absolute lunacy.

While an Executive Director in the World Bank 2002-2004, a time during which Basel I was discussed I did what I could to alert to the huge mistakes of its pillar, the risk weighted capital requirements for banks. Unfortunately I was not able to convey my warnings, and these were approved in June 2004.

I hope that David Malpass, now nominated by USA, if confirmed as the next president of the World Bank, fully understands the following:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements impede banks from taking efficiently the risks that are needed to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd.

Second, that what’s perceived ex ante as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large bank exposures to what is especially perceived (or decreed) as safe, against especially little bank capital.

PS. Here is a brief summary of what I had to say on this issue before and during my term as an ED. It includes two letters published by FT


February 04, 2019

Carrot: We will pay you $xxx for each Kalashnikov you hand over. Stick: If we find you one after x you’ll go to jail for ten years!

Sir, in your “Broad front needed to address Venezuela crisis” you opine that the “Diplomatic effort requires reasonable balance of carrot and stick” February 5.

Indeed! In 2007 the degenerated Hugo Chávez decided to weaponize his supporters, the “colectivos”, by importing 100.000 Kalashnikovs from a willing salesman, Russia.

For Venezuela to come out reasonably well from its current predicaments, those rifles must be collected.

If all those who oppose the possession of guns in their own country dedicated just three percent of their efforts to help Venezuela to collect those rifles so as to have these destroyed, they might provide more human assistance than shipping many tons of foods and medicines.

If that’s not done all food or medicines sent might not reach those unarmed Venezuelans who most need it.


February 03, 2019

Redistribution profiteers have a vested interest in us ignoring the wealthy already redistribute their purchase capacity.

Sir, Tim Harford writes “One academic paper produced by Emmanuel Saez (a star in the study of inequality) and Peter Diamond (a Nobel laureate and colleague of Mirrlees) estimated that the combined rate of tax on the income of high earners could be 73 per cent in the US without proving counter-productive…[for that they] assume that a dollar is 25 times more valuable to a person on about $50,000 a year than to a person on $500,000.” “The super-rich are an easy target for tax rises” February 2.

Indeed, and that‘s why those with much higher income sometimes buy shoes that are 25 times more expensive than those earning much less. But, where does that type of analysis take us? Should jobs producing expensive manually produced shoes be prohibited? Should we have dollars with sensors that measure the value we assign to them? 

The problem with all the “resolve poverty and inequality by taxing the wealthy” is that it ignores the fact that all the purchase power that the income of the wealthy contains, is immediately returned to the real economy when purchasing assets and services. 

In this sense those prescribing higher taxes on wealth are, at the end of the day just arguing, they are better redistributors than the wealthy. Are they? Perhaps yes, perhaps no. In Venezuela those redistributing wealth have clearly done so in order to get their hands on the wealth. In Venezuela we have a saying that goes “The one who cuts the cake in order to distribute the cake, keeps the best part of the cake.

PS. Thomas Piketty should visit the Museum of Louvre in his Paris, and make a checklist of how much would not have existed there, had it not been for some “filthy rich”


Lie Detectors, many journalists would also benefit from lessons on fake news.

Sir, Simon Kuper describes the experiences of Belgian journalist Valentin Dauchot when dispatched to discuss fake news with classes of 10 and 11-years-old in Europe. Lie Detectors, a Brussels-based NGO that sends journalists to do that, finds that “children are often internet-savvier than teachers, and probably more so than old people”. “A lesson in fake news”, February 2.

Sir, I wonder how those children would classify the following information:

“Since your teachers have decided that dark forests are much more dangerous for all of you to enter, than staying out playing in an open field, anyone of you who enters the darkness of such forest, will be forced to eat broccoli and spinach for a full month. Anyone of you staying in the sunlight of the open field, will be rewarded with chocolate cake and ice cream each day for a whole month”. True or fake?

The children would respond: “Of course we wish it was true of course but, unfortunately, it has to be fake. Who would give us chocolate and ice cream for staying where we want to be, and spinach and broccoli for not entering what we already find to be scary?

Correspondingly, how would adults respond when they hear that regulators have risk weighted the capital requirements for banks, allowing these to hold much less of it against safe assets than against risky assets?

Most adults would say surely “True” “Great!”, and this even if anyone who has read anything about bank crises know well that the worst of these always result from excessive exposures to something ex ante perceived as very safe but that, ex post, turns out to be very risky, e.g. AAA rated securities.

Of course bankers, in this case being the children, cannot believe their luck with such fake regulations being decreed true by the Basel Committee. Imagine, earning the highest risk adjusted returns on equity on what’s perceived as safe! Imagine being able to hold much less equity against what we most love to hold, which of course leaves much more for bonuses to us!

Sir, how could Lie detectors help the adults, including of course journalists, like many in FT, to be more alert to the truthfulness of news and regulations? A good place to start would be with a full explanation of confirmation bias… that here resulting from most loving much too much the populist message of: “We have risk weighted the bank capital requirements for you so as to make these safer” 


When restructuring Venezuela’s debt, start with identifying all odious credits.

Colby Smith writes “analysts reckon Venezuela has some $140bn debt outstanding with over $65bn owed to bondholders and another roughly $40bn due to China and Russia.” “Venezuela’s welter of debt will mean a messy restructuring” February 2.

The key word here is “reckon”… because the indebtedness of Venezuela has clearly not followed a transparent process. Frequently there are references to odious debts, but very rarely or never to the fact that these most often arise from odious credits that should never have been awarded. That “odiousness” extends from a shameful lack of due diligence to outright participation in corrupt acts.

All citizens in the world would greatly benefit from having a clear definition of what should be considered odious credits, and of its consequences. Without it, any Sovereign Debt Restructuring Mechanism (SDRM) similar to the one proposed 2002 at the IMF by Anne O. Kruger, would be found wanting.

PS. Because Robin Wigglesworth has touched on this theme I am copying him. 

January 27, 2019

The Blue Monday fiction is nothing when compared to Basel Committee’s risk weighted capital requirements fiction.

Sir, Tim Harford writes, “Given that it is pure fiction, the “Blue Monday” meme is showing surprising longevity”, and he asks “Why do such ideas endure? What do they tell us about our attitude to science, evidence or the truth itself?” “The pseudoscience of Blue Monday hits trust” January 26.

But really, what’s the significance of some falling for an innocous Blue Monday fiction, when compared to that fiction that what's perceived as risky is more dangerous to our bank systems than what's perceived as safe? 

The first one might cause some to travel on not a really adequate date for them, the latter, when translated into risk weighted bank capital requirements for banks, distorts the allocation of credit to the real economy; only guaranteeing especially large crises, because of especially large bank exposures to something perceived as especially safe that turns out to be especially risky, held against especially little bank capital.

Harford refers to Onora O’Neill in that “we should be aiming for a better ability to trust what is trustworthy and to mistrust what is not”. In the case of journalists he says that “the non-experts among us could do more to keep ourselves well-informed.”

Since the information on bank regulations is out there readily available for anyone who cares to look at it, that should suffice to answer his question on whether “we should be more trusting, or more sceptical?”

Sir, Skepticism 101 courses are much needed. May I humbly suggest you and Harford could benefit from taking one of these?


If you finance “safe” consumption more than “risky” production, growth will come to a standstill.

John Dizard writes: “What if global income growth, or even national income growth, cannot cover the cost of servicing capital? Then the capital market machinery would have to shift into generating losses rather than returns.” “Bondholders face greater likelihood of haircuts as system goes into reverse” January 26.

Absolutely! When regulators decided that banks could hold less capital against the “safer” present than against the “riskier future”; meaning they could leverage more with the safer present than with the riskier future; meaning they would be able to earn higher expected risk adjusted returns on equity when financing the safer present than the riskier future, they ordained that to happen.

Basel II assigned a risk weight of 35% to residential mortgages, which on an 8% base capital signified a capital requirement of 2.8%, which signified an allowed leverage of 35.7 times.

Basel II assigned a risk weight of 100% to unrated entrepreneurs, which on an 8% base capital signified a capital requirement of 2.8%, which signified an allowed leverage of 12.5 times.

That allows banks to earn higher risk adjusted returns on equity financing residential mortgages than giving loans to entrepreneurs.

The consequence? Many will sit in their houses without the jobs needed to service the mortgages or pay the utilities.


January 16, 2019

What good is it to celebrate the euro’s first 20 years if, as is, it won’t make the next 20?

Sir I refer to Martin Wolf’s “Marking the euro at 20: the eurozone is doomed to succeed” January 16.

November 1998 in an Op-Ed titled “Burning the Bridges in Europe” I wrote: 

“As participants in a globalized world in which Europe has an important role, we must naturally wish all members luck, no matter what worries we might secretly harbor.

The Euro has one characteristic that differentiates it from the Dollar. This characteristic makes me feel less optimistic as to its chances of success. The Dollar is backed by a solidly unified political entity, the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.

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. High unemployment will not be confronted with a devaluation of the currency which reduces the real value of salaries in an indirect manner, but rather with a direct and open reduction of salaries or with an increase of emigration to areas offering better possibilities.”

Sir, twenty years later those observations are still valid, and way too little has been done to solve the challenges.

Now add to that the fact that even though Eurozone sovereigns take on debt in a currency not denominated in their own domestic printable one, EU authorities have assigned a risk weight of 0% to all of them. That all points to that it will end badly.

So Sir, though Martin Wolf raises many more or less valid alerts and gives some recommendations worth heeding, he should also be thinking about how to get the euro out from that “0% risk” death-trap corner into which it has been painted.


January 11, 2019

What I as a former Executive Director, pray that any new President of the World Bank understands

A letter to the Financial Times

Sir, I was an ED at WB from November 2002 until October 2004. During that time Basel II was being discussed. It was approved in June 2004. 

I was against the basic principles of these regulations that had begun with the Basel Accord of 1988, Basel I. That should be clear from Op-Eds I had published earlier, transcripts of my statements at the WB Board, and in the letters that I wrote and FT published during that time. Here is a brief summary of all that 

Since then I haven't changed my mind... that package of bank regulations is almost unimaginable bad.

I pray the next president of the world’s premier development bank, whoever he is, and wherever he comes from, at least, as a minimum minimorum, understands:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements, will distort against banks taking the risks that help to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.”, John A Shedd.

Second, that what’s perceived as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large exposures to what is especially perceived (or decreed) as safe, against especially little capital.

Sir, would you not agree that mine is a quite reasonable wish?


January 09, 2019

The world’s banking systems are dangerously fragile, courtesy of inept and statist regulators.

Sir, Martin Wolf writes: “Should we be concerned about the state of the world economy? Yes: it always makes sense to be concerned. That does not mean something is sure to go badly wrong in the near future… It is the political and policy instability, combined with the exhaustion of safe options for credit expansion, that would make handling even a limited and natural short-term slowdown potentially so tricky.” “Why the world economy feels so fragile” January 9.

Sir, as you know because of the thousands of letter I have obsessively written to you on this subject, which you have equally obsessively ignored, I am absolutely sure something has been going very badly for a long time, and will explode… perhaps the sooner the better.

In April 2003, as an Executive Director of the World Bank, in a board meeting I said, "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."

Likewise, a world obsessed with allowing banks to leverage their capital immensely only because something is perceived or decreed as safe, is doomed to overload what’s “safe” way too much with debt, while, relative to that, financing what’s “risky” way too little. That will sure exhaust, sooner or later, any "safe options for credit expansion". That makes for a hell of a fragile bank system. 

Wolf writes, “The long-term credit cycle reached its denouement in the disastrous financial crisis of 2007-08.” 

That crisis was solely caused by excessive exposures to what was perceived as safe, mortgages to residences and AAA rated securities, against which investment banks in the US and all banks in Europe had to hold little capital. Did regulators wake up and change their risk weighted capital requirements, which are so idiotically based on the idea that what’s perceive as risky is more dangerous to our banking system than what’s perceived as safe? No! No real denouement there.

And then Greece exploded in 2009, and the fact that statist EU authorities had assigned all Eurozone sovereigns a risk weight of 0%, which allowed EU banks to lend to Greece against no capital requirement at all, which clearly doomed the not so well managed Greece to excessive indebtedness, does not even appear listed among the causes for its tragedy. No denouement there either. EU sovereigns are still risk-weighted 0%.

Sir, just look at houses. Easy financing made available by very low capital requirements turned what used to be homes into investment assets. All this while entrepreneurs, those who could create the jobs so that house owners can afford to service their mortgages and pay the utilities, were denied credit or charged higher interest rates, because of higher bank capital requirements. Just you wait till that easy financing stream stops and too many house owners wish to convert their houses into main-street-purchase capacity again. It's going to be hell.


January 06, 2019

Imposing a marginal minuscule cost per web-ad-message could perhaps help level the playing field for the boring truths against the much more fun fake news.

Sir, Tim Harford expresses it clearly when he writes, “Fake news itself does not pose an existential threat either to democracy or the free press. What does pose such a threat is a draconian response from governments.” “There is no need to panic about fake news” January 5.

Indeed but Basic Skepticism 101 courses are still much needed. I have for decades objected to that draconian response from regulators that states: “We will make your banks safer with risk weighted capital requirements”, which they based on the loony idea that what’s perceived as risky is more dangerous to our bank systems than what is perceived as safe. 

Of course that is as fake as a regulation can be. Not only does it distort the allocation of credit to the real economy but it also puts bank crises on steroids. As for now, that only guarantees especially large crisis, because of especially large exposures, to what is especially perceived as safe, against especially little capital.

Hartford also worries about “that there is far too little transparency over political advertising in the digital age: we don’t know who is paying for what message to be shown to whom”. I agree but one important cause for that is that there is no marginal cost to be paid by those spreading news and ads on the web.

If every ad messaging on the web forced the messenger to pay a minuscule amount per message, then we would be more carefully targeted, meaning wasting less of our limited attention span, and it would be less easy for fake-more-fun-news messengers to compete with “real” not-as-fun-news outfits, if there now is such a thing.

PS. If those revenues help fund an unconditional universal basic income, then it would be even better. 


January 02, 2019

There's a new class war brewing, that between employed and unemployed.

Sarah O’Connor, discussing the challenges of the Gig economy writes, “Offering employment benefits to drivers might well help to snap up the best workers and hang on to them. But if customers were not to shoulder the cost, investors would have to.”“Uber and Lyft’s valuations expose the gig economy to fresh scrutiny” January 2.

Sit to that we must add that if the investors were neither willing to shoulder the cost, then the gig workers would have to do so, or risk losing their job opportunities.

That conundrum illustrates clearly the need for an unconditional universal basic income. Increasing minimum wages or offering other kind of benefits only raises the bar at which jobs can be created, while an UBI works like a step stool making it easier for anyone to reach up to whatever jobs are available.

Sarah O’Connor also mentions how a collective agreement was negotiated between a Danish gig economy company and a union. Great, but let us not forget that in the brewing class-war between employed and unemployed, the unions only represent the employed… and we do need decent and worthy unemployments too, before social order breaks down.

PS. There's another not yet sufficiently recognized neo-class-war too. That between those who have houses as investment assets and those who want houses as homes.