Where would China be if western world had not placed a reverse mortgage on their economies, in order to keep on buying?

Sir, with interest I have read Martin Wolf’s “How the developed world lost its edge” July 20. In my opinion Wolf ignores two major events that had these not happened would have radically changed the current outlook.

First, regulators told banks: “Go out in the market and negotiate the best risk-adjusted net margins you can. And then, in order to make sure you do not take risks, we will allow you to multiply these margins much more in the case of assets perceived as safe than in the case of risky assets.”

That of course led to the accumulation of excessive exposures and against very little capital (equity), to something ex ante perceived decreed of concocted as safe, like AAA rated securities and sovereigns, which when ex-post turning out very risky caused the 2008-crisis.

And then central banks, with their QEs and ultralow interest rates, hindered the necessary market cleanup, and kicked the 2008-crisis can down the road, a road made unproductive by previous mentioned regulatory risk aversion.

So what resulted? No adjustment and further indebtedness, which allowed prices of assets to increase and demand (among other of Chinese production) to be sustained… further allowing the Chinese to save. 

Wolf writes: “The rapid growth of both trade and cross-border financial assets and liabilities and trade, relative to global output, has come to a halt. In the case of finance, plausible explanations are risk-aversion and re-regulation”. “Risk-aversion”? Yes, but not any new one but that which result from regulators loading up, on top of bankers’ natural risk aversion, there own aversion based on the same perceived risks. The bankers lend you the umbrella when the sun shine’s Mark Twain, would never have believed his eyes had he seen such regulatory nonsense.

Sir, as I’ve written to you many times before, never ever has a generation taken on so much debt to finance their own consumption, and shown so little respect for the needs of future generations, those needs that include bankers lending to risky SMEs and entrepreneurs.

How can a Western world made great by taking risks, not lose its edge by avoiding it?

Wolf concludes with: “Rising populist pressure across the high-income economies makes managing these shifts far more difficult.” Indeed, but let us not forget that this mess began when some truly inept populist technocrats, like real life Chauncey Gardiners, convinced governments they knew what they we doing.

PS. Martin Wolf also fell for it.

@PerKurowski

Risk weights of 20% for AAA rated and 150% for the below BB-, evidences the Basel Committee’s intellectual failure

Sir, Brooke Masters makes a lot of good points in her “Loss of a safety-first regulatory regime is no reason to party” February 4. Unfortunately, again, as is usual for almost all commenting on bank regulations, these are solely from the perspective of the safety of banks; so rarely from the perspective of the borrowers, most specially the “risky” borrowers, like the SMEs and entrepreneurs, and whose borrowings are taxed with the highest capital requirements for the banks.

When Masters’ writes that relative to some large institutions “Some smaller banks are struggling with high compliance requirements”, it is so in much because the natural borrowing clientele of smaller local banks belong to the “risky” group.

Masters ends by recommending: “just trim back the Dodd-Frank rules and stay in the Basel process but temper its safety drive… even try leaving the fiduciary rule in place”

I do not agree. The Basel Committee has produced regulations that make no sense to the real economy and, if you really want banks to have a chance to be sustainably safe, you must make sure the allocation of credit to the real economy is efficient and adequate. The Basel Committee with its risk weighted capital requirements dangerously distorts that allocation. And all based on the completely erroneous theory that what is ex ante perceived as risky is riskier ex post to the banks than what is perceived as safe.

That the AAA rated, so dangerous in that a perceived safety can easily cause very high exposures, have a risk weight of 20%, while the really so innocuous below BB-rated are assigned a risk weight of 150%, is about the best example of how confused current bank regulators are. To rebuild those regulations using the same builders and who are not even recognizing the mistakes cannot lead to anything good. Face it, banking after around 600 years of functioning, was in 1988, with Basel I, dramatically changed for the worse. 

The Dodd-Frank Act? What can I say: to me it is a monument to legislative surrealism. For instance in its 848 pages it does not even mention the Basel Committee for Banking Supervision.

Fiduciary role? Since no one can really guarantee that any fiduciary responsibility is complied with, it is better not to imply such thing with regulations. The best approach is just explaining to investors what its acceptance or not by the advisors, is “supposed” to mean. 

PS. It would be great if Brooke Masters used her influence to get some answers from any bank regulators to these questions.

PS. The sad truth is that our banks are in the hands of Chauncey Gardiner type regulators.

@PerKurowski

When will supposedly sophisticated papers like Financial Times wake up to the horrors of current bank regulations?

Sir, Ray Soifer writes: “No wonder banks’ shares generally trade at a discount to their stated book value. No one really knows what their true net asset value is — too often, not even the management.” “Picture of risks in banks’ portfolios is still fuzzy” January 17.

Of course! How could it be otherwise? Banks are currently most certainly paying more for consultants to understand their regulator’s risk/required capital management, than what they pay for the risk management of their own portfolio. Because, how is one to understand risks in banks’ portfolios when the risk weights used by regulators are, to top it up, portfolio invariant, since to do these portfolio variant would be, as they confess, too difficult for them to do?

Could it be because when something is too out of line, it is sort of easier to attribute an intelligent motive to it? Sir, again it all reminds me so much of Chance gardener a.k.a. Chauncy Gardiner

@PerKurowski

The absurdity of Mario Draghi’s leadership is even worse when considering his close connection to bank regulations

Sir, Wolfgang Kuhn writes: “Mario Draghi, the president of the European Central Bank, relies on bank lending to stimulate the economy but criticises “an excess of eurozone lenders” (“Draghi blames ‘over-banking’ for low profits”, September 23). He worries about systemic risks of big financial institutions but he wants to get rid of small ones.” “Draghi’s leadership is a cause for concern” September 26.

Indeed, but let us try to understand Mario Draghi. Besides being the president of ECB he was once the chair of the Financial Stability Board and is the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision.

So, with his bank regulator hat on, Draghi might think that if the whole banking system was reduced to some few Too Big To Fail banks, then his troubles would be over.

Jest aside, Draghi’s close link to bank regulations makes it even so much worse. Draghi should know that the risk weighted capital requirements for banks stops bank credit from being allocated efficiently to the real economy, and that is probably the greatest absurdity with him. He injects liquidity, and then he stops it from reaching “the risky”, like SMEs and entrepreneurs.

I don’t know why, but in the case of Mario Draghi (and other regulators) I often get the feeling that some Jerzy Kosinski - Being There - Chauncey Gardener - Chance the gardener characters, have somehow managed to infiltrate the higher spheres of finance.  They are walking systemic risks!

If Draghi were a nanny at a sandbox, he would tell the kids to beware of the ugly, and trust much the nice looking

Sir, I refer to Claire Jones’s “Draghi rejects criticism of ECB rate drop” May 3.

Mario Draghi is the former chair of the Financial Stability Board and the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision.

As such, he has been and is a full supporter of the risk weighted capital requirements for banks, those supposed to make banks safer; those that for instance in Basel II assigned a risk weight of 20% to those rated AAA, and one of 150% to those rated below BB-.

I'm sorry, anyone who believes borrowers rated below BB- pose a greater risk for the banking system than those rated AAA, has never ever walked on Main Street and has no idea of life and risks.

Therefore Sir, I would never ever contract Mario Draghi to watch over my grandchildren at a sandbox, much less to be president of the ECB.

If Draghi now wants to convince us that negative interests are good, let him, I still don’t trust him.

Draghi puts, like so many others, like your Martin Wolf, a lot of the blame on a savings glut. That completely ignores the fact that so many SMEs and entrepreneurs are kept from using that saving glut to try to have a go at their dreams, only because of credit risk adverse bank regulators.

To even think you need negative interests to get an economy going is, how can I put it mildly, totally absurd.

By the way his squabbles with Germany are, in this context, completely irrelevant to me.

PS. Could Draghi by any chance just be another Chauncey Gardiner?

@PerKurowski ©

Three questions that could help determine whether ECB’s Mario Draghi is for real, or just another Chauncey Gardiner.

Sir, Katie Martin, in Short View March 11 writes: Mario Draghi says that he still has ammunition left in his battle against deflation. But the question is whether he’s using it to shoot himself in the foot”.

Perhaps we should clarify that it is not really his ammo, and that the foot Draghi shoots, is our real economy.

And so now Draghi wants to “dose of cheap-as-chips cash for banks to lend to the real economy… “and even rewards banks for lending to the real world”

Why are the banks not doing that already? The simple answer is because of the restrictions that, in a severely bank capital constrained world, regulators, like Mario Draghi, have imposed with the risk weighted capital requirements for banks.

And so now Draghi wants to counter-distort one of his own distortions?

No, if Mario Draghi was working for me, he would be long gone, because he I believe he is inept and he has clearly failed.

John Kenneth Galbraith in “Money: Whence it came, where it went” wrote: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”. Well I am not pretending any knowledge, and I have sure asked for many explanations.

Again, why do we not ask Mario Draghi some easy questions? If he cannot give us answers we understand, then I hold he is, in the best of cases, just another misplaced figure like Chauncey Gardiner in Jerzy Kosinski’s “Being there”.

And that would make of most of you out there, sad characters that herald Draghi as visionary and quote him, without the faintest idea about what he's really saying.

Question 1. Mr. Draghi why do you believe the capital banks should be required to hold, against unexpected losses, should be based on the perceptions of expected credit losses that banks already clear for with the interest rates (risk-premiums) and the size of the exposure?

Question 2. Why do you think that allowing banks to leverage differently different assets, which clearly affects the risk-adjusted returns on equity each asset group provides, does not distort the allocation of bank credit to the real economy?

Question 3. What is the purpose of banks? I mean when stress-testing banks, why are you only interested in what’s on their balance sheets, and not in what might be lacking, like loans to “risky” SMEs and entreprenuers?

Mr Draghi, we are all ears!

@PerKurowski ©

The Basel Committee by favoring the safe old hurts the chances of the risky new economy to germinate.

Sir, John Authers writes: “That so many public companies are choosing to pay out cash rather than reinvest it is therefore disquieting… Companies are getting less cash than they used to, they are not optimistic that they can invest it productively and so they are choosing to deploy it in a way that weakens the chances of sales growth in the future. Not encouraging.” “Follow the cash trail for clues to the growth outlook of companies” November 7.

Disquieting indeed but is it so much worse. Public companies, though many will surely and hopefully be around for many decades or even centuries, do still represent the old economy. The new economy, that is to be born out of the efforts of new entrepreneurs and SMEs, those who might yet not even be dreaming about a public level.

And so that bank regulators, by requiring higher capital requirements when lending to the risky new than when lending to the safer old, hinders the nascent new economy fair access to bank credit, is truly tragic and unpardonable.

When have bank crises resulted from many seeds failing to germinate? These have all resulted from what was thought of as solid trees suddenly falling down. The Basel Committee is treating new grass as bad weed.

Sir I am sorry if I sound like Chauncey Gardiner again.

@PerKurowski ©

When regulators double up on the bankers’ aversion to credit risk, solid sustainable economic growth is not possible.

The world placed its banks in the hands of technocrats who have probably never ever walked on the mains streets of the economy and who therefore concocted about the most dangerous regulation ever, the credit risk weighted capital requirements for banks.

Sir, when to the bankers’ aversion to perceived credit risk, you add the regulators aversion to exactly that same perceived credit risk; you get an overreaction to perceived credit risk. That means banks will dangerously finance much too much what is perceived or decreed as safe, like AAA rated securities and Greece, and way too little, or even nothing, those which are perceived as risky, like SMEs and entrepreneurs… the seeds and seedlings of the economy who need a lot of nurturing. (Oops, here I am sounding a bit like Jerzi Kosinski’s Chauncey Gardiner J )

Under such circumstances, there is no way you can achieve solid growth and, because of that, the world has also wasted away much of its resilience capacity, that composed of government’s borrowing space to sustain fiscal deficits, QEs and low interest rates.

How long will it take for the world to wake up? It is hard to say. Over the last decade I have written way over 200 letters to Martin Wolf on the uselessness and dangers of excessive regulatory aversion to credit risk. From what I read in his “Solid growth is harder than blowing bubbles” October 14, it would seem like he still does not get it.

@PerKurowski ©  J

In the movie “Mission Impossible: Rogue Bank Regulators”, FT could play a leading role.

Sir, Nigel Andrews, when reviewing “Mission: Impossible — Rogue Nation” and because someone there says “Today is the day the IMF’s luck runs out” mentions this “Sounds like a case for the Financial Times”, “Fantastic nonsense of a mission implausible” July 31.

Clearly it not, since there “the Impossible Missions Force puts its lives on the line to combat The Syndicate, a group of global agents/ spies gone terrorist”

But what if the next Mission Impossible movie had team Cruise fighting against those rogue statist regulators who, for purposes of determining the capital requirements for banks, imposed risk weights of 100 percent on the private sector and zero percent on the government? That would surely be a case for the Financial Times. In fact then FT, with its silence about the distortions those regulations cause in the allocation of bank credit to the real economy, could even have the right to ask for a leading role in the film. Now if FT gets that role, I wonder who would play you, The Editor, and who Martin Wolf?

Of course, since there are so many expert technocrats/bureaucrats that play a prominent role in the Basel Accord incident, the production would be star studded. Because there are so many “Chauncey Gardiner" characters in the plot, it is truly unfortunate Peter Sellers is not with us any longer. Can you imagine how good he could have been as Mario Draghi?

Are our brains wired so as to make us confuse ex-post real risks with ex-ante perception of risk?

Sir, James Macintosh writes: “When investors come to believe that the inherent uncertainty of markets or economies has gone away, it is usually a sign of trouble ahead, as it encourages excessive risk-taking.” Short view, June 19. And of course its opposite is the more uncertain economies seem to be, the less risk-taking will be done.

So I need to ask, once intellectually Mr Macintosh accepts that proposition, why is it so hard for him, and for others to take the leap and dare understand how utterly wrong current bank regulation is, with its more-risk-more-capital and less-risk-less-capital?

Is it something in our brains that confuses ex-post real risk with ex-ante perception of risk? Or is it something else. Like that it would require us believing experts could be 180 degrees wrong… and that is something too uncomfortable to accept?

Mr Macintosh, welcome to the real world where a Mario Draghi and many others, are just like any Chauncey Gardiner figure extracted from Jerzy Kosinski’s “Being There”. 

@PerKurowski

Has Europe fallen into the hands of a Chauncey Gardiner like figure?

Sir, I refer to Joel Lewin’s “European QE redraws junk bond frontier” April 14.

Were the implications not so tragic one could have joked about Europe having fallen into the hands of a Chauncey Gardiner like figure; the gardener elevated to Economic-Guru in Jerzy Kosinski’s “Being There”.

ECB’s/Mario Draghi’s seems not to understand the dangers of flooding the markets with QE liquidity, while the channels for that to flow by means of bank credit to where it is most needed, like to SMEs, are clogged. Firmly clogged by senseless credit-risk-weighted equity requirements for banks.

The overflow of liquidity, into more risky bonds, creates clearly serious risks for individual investors. But, for the economy at large, much worse is the dangerous overpopulation of the “safe-havens”; and the even more dangerous refusal to explore the risky bays, where there is a chance to find what could feed the future.

At least a normal gardener would now you need to water the plants, but not too much.

@PerKurowski

Chavez 21st-Century social vision! My oh my!

Sir, if Mugabe’s Zimbabwe had Venezuela's oil, would he perhaps also be associated with a “vision” of “21st-century socialism”? When writing about Chavez promoting his vision, don’t forget that we Venezuelan citizens would all be much happier if indeed Chavez really had a vision, of any sort? Then we would at least know where we were heading, and what to do about it. What we now have is just plain confusion, ineptitude and corruption financed by the mother of all oil curses, and that is as far away from a vision as you could possibly be. To really understand the Chavez phenomenon you need to think of him as the most fabulous stand-up improvisators ever; performing in front of an audience with an immense and justifiable appetite for hopes about a better future; and finally drawing most of his material from the traditional anti-Americanism tree, and which as you know has lately been able to provide unusually much energy for its parasites to munch on. Under such favorable conditions, can you doubt Chavez’s success?

Outside “objective” observers though, like FT, would also do good to also reflect upon the media’s huge capacity of inadvertently advancing the voice of figures like Chauncey Gardiner in Jerzy Kosiński’s Being There. Chavez is a haunted man, running ever faster forward and, any day now, the majority of his followers are going to suffer an immense deception. Honestly, they don’t need or deserve that.