British Museum’s “Currency in crisis: German emergency money 1914 – 1924”

British Museum’s “Currency in crisis: German emergency money 1914 – 1924”

“Notgeld”

Do we have a banking system with banks as they are supposed to be?

Sir, I refer to your “Non-bank lenders will bear brunt of credit crisis”, March 25

John Augustus Shedd (1859–1928) opined: “A ship in harbor is safe, but that is not what ships are for”

But bank regulators paid banks with lower capital requirements to stay safe, thereby overcrowding “safe” harbors. As a result, those who had real reasons to stay in safe harbors, like many non-bank lenders, and were less prepared to do so, like many non-bank lenders, had then to take to the risky oceans.

You opine “we are in a better place today because regulators forced greater protections on the banking system” What greater protection? A measly 3% leverage ratio supposed to cover for misperceptions of risks, like 2008’s AAA rated, and unexpected dangers, like coronavirus? You’ve got to be joking.

You quote Ben Bernanke “If you do not have a banking system, you do not have an economy.” Sir, do we really have a banking system with banks as the bank’s we used to know, or as banks are supposed to be?

I mean, with zero bank capital requirements against loans to the government and eight percent against loans to citizens you do not have a free market economy, you have financial communism.

With lower bank capital requirements for residential mortgages than for loans to the entrepreneurs or SMEs, those who can create the jobs needed in order to service utilities and mortgages, you will not have a functional economy, and houses have morphed from being affordable homes into being the main risky-investment of way too many families.

Sir, for the umpteenth time the Basel Committee’s risk weighted bank capital requirements: guarantees especially large bank crisis, caused by especially large exposures held against especially little capital to assets perceived as especially safe, but one of which suddenly one turns out as especially unsafe.

If John A. Shedd was alive today he might have opined: “A ship is safer on the oceans than staying in  a safe harbor, which might become dangerously overcrowded.”

http://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

@PerKurowski

The coronavirus will unleash a horrific Minsky moment in our bubbled-up debt overextended economies

Sir, I refer to Martin Wolf’s “The virus is an economic emergency too” March 18. 

Indeed, more than a week ago I tweeted: “The world is prepared somewhat for the expected, but not enough for the unexpected. That’s why, worldwide, coronavirus will cause larger number of deaths because of its economic consequences, than because of its health implications”.

And for years I have also tweeted, “The current fake-boom, put on steroids by huge central bank liquidity injections, low interest rates, and Basel Committee’s pro-cyclical risk weighted bank capital requirements, will end in a horrific Minsky moment bust, equally put on steroids.”

Sir, bank capital requirements used to be a percentage of all assets, something which to some extent covered both EXPECTED and UNEXPECTED risks. But currently Basel Committee’s risk weighted bank capital requirements, those that operate over the silly low 3% leverage ratio, are solely BASED ON EXPECTED credit risks. So even if Wolf can write “The pandemic was not unexpected”, for banks and its regulators it sure was completely, 100%, unexpected. And all the banks will now soon stand there completely naked.

And what help can banks be expected to give entrepreneurs and SMEs when they are required to hold much more capital when lending to these, than when holding “safe” sovereign debts and residential mortgages? Will banks be able to raise the needed 8% in capital or will regulators lower that requirement?

Wolf writes, again, “Long-term government debt is so cheap”. Sir, when will Wolf dare think about what those rates would be, for instance in Italy, if its banks needed to hold the same amount of capital against loans to their government than against loans to their Italian entrepreneurs?

“Governments can just send everybody a cheque”. Yes, a perfect moment to build up an unconditional universal basic income scheme; but it needs to be well funded, not with public debts expected to be repaid by our grandchildren. Possible sources are high carbon taxes, something which would align the incentives in the fights against climate change and inequality; another possibility is to tax those advertising revenues generated by exploiting our personal data.

PS. As to USA it should immediately eliminate of all health sector discrimination in price, access or quality, between the insured and the uninsured.

PS. As to education all professors and administrative personal should have their salaries reduced, something which should be compensated by participating somewhat in their students’ future income streams.

http://subprimeregulations.blogspot.com/2020/03/the-basel-committee-for-banking.html

@PerKurowski

The seeds of the next debt crisis are to be found in the kicking of the 2008 crisis can forward, without correcting for what caused that crisis.

Sir, I refer to John Plender’s “The seeds of the next debt crisis” March 4.

Plender writes: “From the late 1980s, central banks — and especially the Fed — conducted what came to be known as “asymmetric monetary policy”, whereby they supported markets when they plunged but failed to damp them down when they were prone to bubbles. Excessive risk taking in banking was the natural consequence”

Not exactly “risk taking”! The risk weighted capital requirements caused excessive dangerous bank exposures, not to what was perceived risky, like loans to entrepreneurs, but to what was perceived safe, like residential mortgages; or decreed as safe, like the sovereign; or concocted as safe, like what banks’ internal risk models produced.

Plender asks: “Has the regulatory response to the great financial crisis been sufficient to rule out another systemic crisis and will the increase in banks’ capital provide an adequate buffer against the losses that will result from widespread mispricing of risk?”

No, it has not been sufficient. That because the incoherent response to a crisis caused by AAA rated securities backed with mortgages to the US’s subprime sector, was to keep on using risk weighted bank capital requirements based on perceived EXPECTED losses, and not on UNEXPECTED losses.

Plender writes: “The central banks’ quantitative easing since the crisis, which involves the purchase of government bonds and other assets, is, in effect, a continuation of this asymmetric approach”

Indeed, in 2006, when an upcoming crisis was slowly being detected by some, FT published a letter in which I argued for “The long-term benefits of a hard landing”. Sadly, central bankers and regulators wanted nothing of such thing, on their watch, and kicked the 2008 crisis can forward to our children and grandchildren, as hard as they could, and here we are… with world borrowings up to the tilt, and lenders waiting to be blown away by a coronavirus.

PS. At this moment, this letter not included, in my TeaWithFT blog, there appears 2.948 letters sent to you over soon two decades on the issue of “subprime banking regulations”.

@PerKurowski

Any risk, even if perfectly perceived, cause the wrong reactions, if excessively considered.

Sir, I refer to Patrick Jenkins “In our warming world, stranded energy assets are a growing concern” March 3. It evidences the difficulties in understanding how bankers adjust to risks, before and after the introduction of risk weighted bank capital requirements.

The current risk weighted bank capital requirements, which are based on that what’s perceived as risky is more dangerous to our bank systems than what’s perceived safe, only guarantees too much exposures to what’s “safe” and too little to what’s “risky”. So now banks, while “goose herds and whaling ships” are perceived as safe, run the risk of building up too large exposures that are harder to manage when these begin to look risky. 

Therefore, in the old days, before these regulatory distortions, banks were able to handle much better than now any slowly becoming apparent perceived risks, like with “goose herds and whaling ships”. 

What was more dangerous then, and MUCH more dangerous now, is of course the unexpected… like coronavirus.

Again Sir, for the umpteenth time, before, for around 600 years, banks cleared for perceived risk by means of interest rates and size of exposures. But then the Basel Committee instructed banks to clear for exactly those same risks, in the capital too. Sadly Sir, any risk, even if perfectly perceived, cause the wrong reactions, if excessively considered.

@PerKurowski