John Kenneth Galbraith could very well have been asking for the impeachment of current bank regulators.

Sir, Rana Foroohar writes “Americans still fundamentally accept the idea that the private sector always allocates resources more efficiently than the public sector. It is a truism that dies hard” and she uses John Kenneth Galbraith… “concept of countervailing power”, put forth in his 1952 book American Capitalism… a critique of the “market knows best”, as back up. “Old economists can teach us new tricks”, June 3.

Indeed but for a different perspective she should also read John Kenneth Galbraith’s ““Money: Whence it came where it went” 1975. 

I quote: “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]… 

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

So, what would Galbraith had said about current regulator’s risk weighted bank capital requirements? Those that favor credit going even more to those who perceived as safe are already favored, and less to those perceived as risky who already have to pay higher interest rates and get less credit? That which guarantees especially large bank crises, from especially big exposures to what’s perceived as especially safe, against especially little capital?

Sir, I believe Galbraith could very well have joined me in a “Let’s impeach those regulators”.

And for the why these regulations are not sufficiently questioned, let me also quote Galbraith: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”

PS. More than forty years ago, in Venezuela, John Kenneth Galbraith autographed my heavily underlined pocketbook version of “Money”

http://subprimeregulations.blogspot.com/1997/06/puritanism-in-banking.html

http://subprimeregulations.blogspot.com/2019/06/are-these-reasons-not-enough-cause-for.html

https://subprimeregulations.blogspot.com/2016/03/decreed-inequality.html

@PerKurowski

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.

God make us daring!

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

@PerKurowski

What produces more bread? An economy with all consumers being equal, or one with some being filthy rich?

Sir, David Redshaw quotes John Kenneth Galbraith from his 1929 book The Great Crashwith: “The rich cannot buy great quantities of bread.” “Excess wealth can lead to speculative froth” December 13.

True, but when the rich transfer their purchasing power by buying assets that would often otherwise not be demanded, might that not be causing others to have job opportunities that would allow them to buy greater quantities of bread, than would have been the case without the rich?

And Redshaw goes on to say “The economy is motored by the regular and reliable spending of a confident workforce rather than by the mega rich, whose erratic and luxury-end spending always seems to end in boom and bust.”

Really? When has an erratic and luxury-end spending by the mega rich ended in a boom and bust? Last time I looked it was poor buyers of homes in the subprime sector in the US, empowered by being packaged into AAA rated securities, these securities in its turn empowered by regulators who allowed European banks and US investment banks to leverage more than 60 times their capital with these only because they had an AAA to AA rating, which ended in boom and bust.

Sir, never forget that a paper is also measured by what it allows to be published.

@PerKurowski

To understand how the west might be lost it is important to remember how it was won.

Sir, Martin Wolf when reviewing Paul Collier’s “The Future of Capitalism” titles it as “An important analysis of how the west was lost” December 3.

I have not read it yet, but I will be attentive to if Collier gave the film “How the West was won” or John Kenneth Galbraith’s “Money; whence it came, where it went”, or something similar, any consideration when writing this book. That because risk-taking is the oxygen of any development and current regulators, having imposed on banks loony and dangerous risk adverse risk weighted capital requirements, have helped set the west on a downward path.

Wolf does tell us that Collier is for some “updated Henry George type taxation of rent on land, [arguing] we need to tax more forms of rent, including that from agglomeration, which now goes to lucky individuals and businesses.”

I assume “agglomeration” refers here to land and other assets? Of course, if that agglomeration produces higher cash-rents then those rents should be, and already are, mostly taxed, but, if land and assets are taxed on their value, if taxed, land and assets would have be sold, at ever lower and lower prices. How would that asset value deflation solve any problems?

Wolf writes that Collier’s starting point is one on which surely everybody agrees: “Deep rifts are tearing apart the fabric of our societies.” 

Indeed, but as I feel it, much of it is the result of polarization and redistribution profiteers having been so empowered by social media to merchandize their products of hate and envy.

Sir, I’ll stop here until I have read the book.

@PerKurowski

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  J His book inspired the first Op-Ed that I wrote, more than twenty years ago.

@PerKurowski

Citigroup’s Chuck Prince said: “As long as the music is playing, you’ve got to get up and dance”, but bank regulators insist on playing the same 30 years old song.

Sir, Andrew Hill worries about how many of today’s banker class remember it, let alone worry, about the complacency expressed in Chuck Prince’s “As long as the music is playing, you’ve got to get up and dance. “James Gorman, chief executive of Morgan Stanley “Amnesia dooms bankers to repeat their mistakes” June 24.

Hill hopes Gorman “is experienced enough to have detected the echoes of 2007 in the current soundtrack of rising share prices and lowering regulatory burdens… and that he teaches “more of his younger, fresher-faced staff to recognize the tune and know when to bow politely and leave the dance floor.

As for me I would much rather prefer the regulators stopped playing that very same old song of the “risk weighted capital requirements for banks”, composed in 1988 by the Basel Accord, and otherwise known as “You earn higher returns on the safe than on the risky”. That song drove bankers into an intense maniac polka, in pursuit of the very high expected risk adjusted returns offered on what was perceived (houses), decreed (Greece 0% risk), or concocted (AAA rated securities) as safe.

PS. Hill refers to John Kenneth Galbraith’s The Great Crash 1929 account of the willful errors and self-interested speculation of the great investment banks. But Galbraith also wrote “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.” Money: Whence it came, where it went” (1975)

@PerKurowski

To make banks safer, stop allowing besserwisser regulators distort the allocation of credit.

Sir, Martin Wolf writes: “147 individual national banking crises occurred between 1970 and 2011. These crises … were colossally expensive, in terms of lost output, increased public debt and, not least, political credibility” “Why the Swiss should vote for ‘Vollgeld’” June 7.

Sir, in the years before those crises, did the economy grow in the same way? No one seems to be interested in the quality of the booms, as they are all too fixated on the damages of the busts. John Kenneth Galbraith, in his “ Money: Whence it came, where it went” (1975) wrote: “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.”

Wolf writes: “it is often easiest for banks to justify lending more just when they should lend less, because lending creates credit booms and asset-price bubbles, notably in property.” But Wolf, probably being one of those “insiders” Yanis Varoufakis refers to in his “Adults in the room”, refuses to point out how regulators, by allowing banks to leverage much more with “safe” residential mortgages, than for instance with loans to “risky” entrepreneurs, helped feed the property bubble.

The regulators, when interfering with their capital requirements for banks based on the ex ante perceived risks that would usually be cleared for solely by the market, obfuscate market signals, and thereby distort the allocation of bank credit making the economy weaker and the bank system riskier… and there is no way around that! 

PS. Does an ordinary British citizen know, for instance, that their bank regulators allows banks to hold much less capital against loans to Germany than against loans to British entrepreneurs? Sir, don’t you think they have a right to know that? Or is it a case of the risk-weights that shall not be named?

@PerKurowski

Martin Wolf, public borrowings are being subsidized by bank regulations

Sir, Martin Wolf discussing the UK government’s private finance initiative (PFI) and costs of capital writes: “A sophisticated counter-argument is that government borrowing enjoys an implicit subsidy from taxpayers. That represents an unpriced insurance contract… This subsidy makes government funding look cheaper. But this is an illusion. “Public-private partnerships have to change to be effective” January 26.

Illusion? Does Martin Wolf really think that if banks had to hold the same capital against sovereign debt, than for instance against loans to entrepreneurs, the interest rate on public debt would remain the same?

Or, in a similar vein, does Martin Wolf really think that if banks had to hold the same capital when financing houses, than for instance when lending to entrepreneurs, the price of houses would not be negatively affected?

Mr. Wolf: Do you really think it is the risks for the banking system that are being weighted in those capital requirements? If so, I am sorry to have to break the bad news to you, again, for the umpteenth time. The risks that are being weighted for are the risks of the assets per se, which is why regulator want banks to hold more capital against what is ex ante perceived as risky than against what is perceived as safe.

Which explains how they could assign a risk weight of only 20%, to what rated AAA could pose a terrible threat to our banks, and a whopping 150%, to what rated below BB- bankers won’t touch with a ten feet pole.

John Kenneth Galbraith, in his “Money: Whence it came, where it went” (1975) wrote: “What people do not understand, they generally think important. This adds to the prestige and pleasure of the participants” … and yes, Sir, “risk weighted capital requirements” sounds indeed so delightfully sophisticated… almost as much as “derivatives”.

@PerKurowski

Congresswoman Maxine Waters… stop rooting for bank regulations that puts inequality on steroids.

Sir, I refer to Ben McLannahan’s and Barney Jopson’s “Republican puts forward alternative to ‘nightmare’ Dodd-Frank” April 27.

Jeb Hensarling, the chairman of the House financial services committee’s Choice Act includes a provision of requiring banks to hold “at least 10 per cent of gross assets, if they want relief from some of the toughest standards on supervision and regulation”

“Congresswoman Maxine Waters, the top Democrat on the committee, told the hearing that the proposals — known as the Financial Choice Act, which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs — would unleash more “risky and predatory” practices on Wall Street.”

Holding 10 percent, against all assets, would eliminate that odious discrimination against the access to the opportunities of bank credit of "the risky", which result from the current risk weighted capital requirements for banks.

John Kenneth Galbraith in his “Money: Whence it came where it went” 1975 wrote:

“The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Allowing banks to hold less capital against what is perceived as safe than against what is perceived as risky; allows banks to leverage more with what is perceived as safe than with what is perceived as risky; which allows banks to earn higher expected risk adjusted returns on equity when lending to what is perceived as safe than when lending to what is perceived as risky; which means banks will lend more than usual to what is perceived as safe, at even lower rates, which could be very dangerous; and less than usual to what is perceived as risky, unless its done at much higher rates than usual… which unfortunately makes the risky even riskier.

So, as I see it this proposal by Chairman Hensarling should not be applied only to those who want “relief from some of the toughest standards on supervision and regulation” but to all banks.

Of course, I pray that 10% capital requirement applies also to loans to the public sector. As is, lower capital requirements for banks when holding the sovereign’s debts than those of the citizens, de facto implies a belief that government bureaucrats know how to use bank credit better than citizens… and that is of course pure statism, totally false and absolutely unsustainable.

http://subprimeregulations.blogspot.com/2016/03/decreed-inequality.html

@PerKurowski

Moving is most often aversion to the risk of staying. More important, is the willingness to take risks upon arrival.

Sir, Gillian Tett, referring to “Little House on the Prairie” and Tyler Cowen’s “The Complacent Class”, discusses that decline in the “mobility [which] was considered synonymous with the American dream”, “How America’s pioneering spirit disappeared” March 17.

Tett quotes Cowen with “What I find striking about contemporary America is how much we are slowing things down . . . and how much we are investing in stability”; and she concludes recommending: “the next time the Trump team talks about making America great again, maybe somebody should ask how to make America mobile again”

But are those who fled famine, religious or political persecutions, or simply the lack of jobs, all risk-takers? No! What was really important for making America great was that fresh opportunities, like land and bank credit, awaited those who, upon their arrival, were willing to put in the job and take the risks needed.

Sir, let me, for the umpteenth time, quote from John Kenneth 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]”

So, if we are to talk about some diminishing risk-taking affecting the economy, and that blocks the pioneering spirit, then what most clearly stands out is the risk-weighted capital requirement for banks imposed by bank regulators.

Ms. Tett, can you imagine families arriving to a land governed by such like a Financial Stability Board, whose function is to keep banks from failing and do not care one iota about petty little things like banks allocating credit efficiently to the real economy? Would the Ingalls have thrived in such a land?

But Sir, I know, you don’t want to talk about this.

@PerKurowski

Mario Draghi, you should be ashamed, as a bank regulator, you helped to leave behind, those left behind

Sir, Claire Jones and Alex Barker write that Mario Draghi, the president of the European Central Bank, Donald Tusk, the president of the European Council, and Christine Lagarde, the head of the International Monetary Fund…issued separate pleas yesterday to address the plight of those “left behind” by globalization”, “Draghi makes appeal for those ‘left behind’” September 14.

The fact is though that Mario Draghi, the former chair of the Financial Stability Board, and the current Chair of Governors and Heads of Supervision of the Basel Committee on Banking Supervision, is fully supporting the pillar of current bank regulations, namely the risk weighted capital requirements for banks.

That regulation has given a risk weight of 0% to the Sovereign, 20% to the AAArisktocracy, and 100% to We the People, like the SMEs and entrepreneurs.

John Kenneth Galbraith in his “Money: Whence it came where it went”, 1975, wrote: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is”.

And so, with their discrimination against “The Risky”, regulators, like Mario Draghi, decreed inequality. And so they have no right to try to bullshit us now with some deep-felt concerns with those left behind.

And to top it up, with his QEs, Draghi has mostly helped those who already had assets.

@PerKurowski ©

Bank regulators, with their discrimination against “the risky”, decreed lower social mobility.

Sir, Sarah O’Connor writes about “Relative mobility…whether you end up on a different rung of the income or social ladder from your parents” “If we want poor kids to succeed, then more rich kids must fail” May 8.

My impression is that the findings she refers to, that so many on the top of the ladder keep on being on the top of the ladder, might be affected somewhat by survivorship bias. I am sure that an immense number of the descendants of those who centuries ago were up on the top have now descended that ladder.

That said, when O’Connor writes “To boost relative mobility, you would need to unpick… privileges” I could not agree more, especially with respect to entirely artificial privileges. 

The credit risk weighted capital requirements for banks, those that allow banks to hold less capital when lending to the safe “the rich” than when lending to “the risky”, is precisely that kind of hidden privileges that need to go.

For Sarah O’Connor’s benefit let me quote from John Kenneth Galbraith’s “Money: Whence it came where it went” It states: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is” 

And so, with their discrimination against “The Risky”, you could easily argue the regulators decreed lower social relative mobility.

@PerKurowski ©

Regulators have been coopted by banks of “East”, forgetting the needs of those that banks of the “West” best serve.

Sir, Martin Wolf opines, “In the real world, central banks must remain our doctors of choice”, “The risks of central banks’ radical treatments”, May 26.

In it Wolf quotes Mario Draghi, president of the ECB, with: low interest rates “are not the problem. They are the symptom of an underlying problem, which is insufficient investment demand, across the world, to absorb all the savings available in the economy.”

But Draghi, the former chair of the Financial Stability Board, is the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision, and so he is more than a central banker, he is a bank regulator too… and as such he is definitely not my doctor of choice.

With Basel regulations banks have de-facto been told: “If you stay away from lending to the risky (like SMEs and entrepreneurs) then we will reward you with lower capital requirements for what is perceived, decreed or concocted as safe; which means that then you will be able to leverage your equity the most with assets of the “safe” type; which means that then you will earn the highest risk adjusted returns on your equity when doing business with sovereigns and the AAArisktocracy, and financing residential housing.” Does that not sound like a banker’s wet dream come true”

And to put that regulatory favoring of the safe into context, let me quote one who Wolf would not classify as a rightwing populist, John Kenneth Galbraith. In his book “Money: “whence it came, where it went” (1975), Galbraith writes:

“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.

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

And so, to me, that clearly implies that the regulators of the Basel Committee are regulating in favor of, or under instructions from, the banks of “East” and the sovereigns, the respectfully affluent they meet in Davos; while completely ignoring the risk-taking needs of the new economy of the “West”, and for which any additional bias against perceived credit risk, condemns it to even more misery and doom.

In the West live the unemployed, the younger generations, the developing economies and all those clamoring for an opportunity to have a go at their dreams. 

The prime purpose of banks is to channelize efficiently excessive savings to the economy and, if you cut off the options, just because you do not like banks to take risks, those excessive savings must find other outlets or do nothing… all with expected unexpected consequences.

To top it up, regulators did not do their basic homework. Had they done so they would have understood that for the bank systems in general, what is perceived ex ante as risky, poses no danger at all. All big bank crises always result from excessive exposures to something wrongly perceived ex ante as safe.

PS. The following risk weights, for the purpose of determining the capital requirements for banks, evidence clearly he dangerous ideology and ignorance of the member of the Basel Committee.

Sovereigns 0% Citizens 100% can only be risk weights thought up by convinced raving mad statists. 

AAA rated 20% Below BB- rated 150% can only be risk weights thought up by those who have no idea of life on Main Street.

Per Kurowski

@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 ©

Dare ask bank regulators: Why do you think that what is perceived as risky is riskier than what is perceived as safe?

Sir, Philip Stephen writes: “The crash and the subsequent depression broke the confidence of a generation of political leaders. All the guff they had learnt about a new financial capitalism, self-equilibrating markets and the end of boom and bust was shown to be, well, guff… bankers by and large got off scot free. Not so politicians who believed their own propaganda and embraced the laissez faire Washington Consensus as the end of history. Capitalism survived the crash, but at the expense of a collapse of trust in ruling elites” “Politicians are paying the bill for the crash” December 18.

What “laissez faire Washington Consensus”? That which with the Basel Accord prescribed a risk weight of zero percent for sovereigns and 100% for the private sector? That which with the risk-weighted capital requirements for banks completely distorted the allocation of bank credit?

The problem is that the trust of politicians in the ruling regulating technocrats did not collapse. As I have said many times, neither Hollywood nor Bollywood would have been so dumb as to allow the producers of a box office flop like Basel II to proceed, with the same scriptwriters, to produce Basel III.

I have a feeling politicians, Fed’s policy makers and perhaps even some FT journalists start to suspect that something is making the Fed and the ECB stimulus fail; and would therefore want to ask regulators: Why do you think that what is perceived as risky is riskier for the banking system than what is perceived as safe?

Why don’t they ask? Perhaps the explanation is one that John Kenneth Galbraith gave in “Money: Whence it came where it went” 1975, namely that “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”

PS. Sir, now when the credit quality of EM markets is deteriorating, banks holding such debt are required to put up more capital against positions taken up during sunnier days, putting a squeeze on bank lending, and so everything will become darker yet. Vive la procyclicité!

@PerKurowski ©

When regulators told banks: “Stop chancing on the future and just safeguard the past”, they doomed the middle class

Sir, I refer to Sam Fleming’s and Shawn Donnan’s FT’ Big Read. “America’s Middle-Class Meltdown: Changing fortunes” December 10.

To explain why the middle class and those who aspire to be middle class, those who are doing fine and growing when the economy grows in a balanced way are currently doomed, let me quote two passages from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

First: “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]”

Second: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

And so Sir, when bank regulators introduced credit risk weighted capital requirements for banks; which allow banks to leverage more their equity with the net risk adjusted margins provided by those perceived as safe, than with those provided by the “risky”; which allows banks to earn much higher risk adjusted returns on equity when lending to the safe than when lending to the risky; then they effectively instructed banks not to take a chance on the more risky future, but to concentrate on safeguarding the safer past… and that was, and currently is, the beginning of the end of the middle class… and the increase of inequality.

Let us be clear, in the Home of the Brave, the Trojan Horse of the Basel Committee, helped cement a dangerous sissy aversion to credit risks.

​@PerKurowski ©

Sissy and dumb credit-risk weighted capital requirements for banks, make it impossible for Europe to stand tall

Sir, I refer to Wolfgang Münchau’s “Europe will stumble before it learns to stand tall” December 7.

Münchau opines that the problems of some European countries resulting from the inability to devalue and the influx of workers from abroad, in order to conclude in that “if there is to be another stage of integration [for Europe] there will have to be a phase of disintegration first”

Sir, independently from those two important problems, let me assure you that no country can learn to stand tall, with regulators who give banks huge incentives to make their profits with what is perceived as safe, and to stay away from what is perceived as risky.

If you keep allowing crazy bank regulators to respond to their own small minded risk apprehensions when regulating your banks, Europe will not only stumble, it will fall.

Risk-taking is what keeps economies moving forward… and banks are in the frontline of that risk-taking. Do not now require the widows and orphans to substitute for the banks.

Again I dare anyone associated with the Basel Committee for Banking Supervision and the Financial Stability Board to debate publicly my ever-growing list of issues and concerns.

Why the thundering silence on the distortion in credit allocation the credit risk weighted capital requirements cause? John Kenneth Galbraith suggested an answer with his “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”

@PerKurowski ©

There are social leftwing reformers and statist leftwing reformers. In banking currently only the latter exist.

Sir, John Dizard, referring to Senator Bernie Sanders and Senator Elizabeth Warren writes “The US financial industry should listen to leftwing reformers” December 7.

Frankly, if by leftwing he refers to someone defending the small and poor, then I do not know of any real leftwing reformer. John Kenneth Galbraith in his “Money: Whence it came where it went” 1975 wrote: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

And current credit risk weighted capital requirements, to which I have heard none from the supposedly left raise objections, hinders precisely “the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.”

And, it is only going to get worse. That “Fed’s total loss-absorbing capacity… will require an estimated additional $120bn in equity and debt” Dizard refers to, that one is also based on credit risk weighted assets.

But of course, if it is leftwing reformer as in being statists, then they must be plentiful of them, as very few have raised objections to that in 1988, with the Basel Accord, the risk weight of sovereign (government) was set at zero percent, while the risk weight for the private sector was defined as 100 percent.

No Sir, whether leftwing or rightwing, I would not like to have anyone who fails to state in very clear terms what he believes to be the purpose of the banks, and I agree with that purpose, to have anything to do with regulating banks.

@PerKurowski ©

A pro-regulation mindset blinds leftwing economists from understanding how anti-egalitarian bank regulations are.

Sir, Gillian Tett writes “Rightwing economists tend to blame government regulation for lower growth” and since she does clearly not think so, I guess she identifies with the left, “A puzzle Yellen cannot solve with a rate rise” December 4.

I blame regulations for lower growth and especially the credit-risk weighted capital requirements for banks that distort the allocation of bank credit to the real economy.

Favoring bank lending to what is perceived as safe de facto discriminates against the fair access to credit of those perceived as risky. And so inasmuch as it fosters inequality, and inasmuch as the left professes to hate inequality, leftwing economist should also oppose that regulation.

In “Money: Whence it came where it went” 1975: John Kenneth Galbraith, wrote “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.”

The problem with leftwing economist is that their mind set is so pro-regulation they cannot fathom regulators doing any wrong, and also so against the bankers, that they blind themselves to that credit-risk weighing is as anti-egalitarian as regulations come.

@PerKurowski ©

The inactivity and passivity the BoE’s Monetary Policy Committee reflects must despair the upcoming generations.

Sir, I read twice your “The Bank of England augurs a year on hold”, and twice Richard Barwell’s “The great Monetary Policy Committee mystery”, November 6.

My conclusion is that were I 40 and some years younger, about to start working and thinking about a family, I would not be looking with kind eyes on the inactivity that is there reflected... 25 bp up or down or no change at all.

But, if I also knew that bank regulations, by means of capital requirements, were in Mark Twain’s terms giving banks further incentives to lend the umbrella when the sun was out, and to take it away when it looked like it was going to rain, then I would really be pissed off. What do these bank regulators mean? Is the avoidance by banks of perceived credit risks, more important than my future?

And from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975, I would quote to those respectable and so political correct bank regulators the following:

“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…

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Bank regulators do you not know that the upcoming generation is already living new economic Wild West realities, made worse by having to suffer these under the thumb of a West Coast type bank regulatory establishment?

@PerKurowski ©