The debt-ceiling is just as much the debt-roof from which the US will need to climb down from.

Sir, Sir Samuel Brittan should really be commended for reminding us of what is also at stake when stating “The recent fiscal policy deadlocks we have seen in Washington are a price worth paying for proper checks and balances”, “A moderate outlook with the chance of a new crisis” October 18.

In many languages there is just one word for the ceiling and the roof, in Spanish “techo”. And that is why it might be so difficult to translate the nuances of a debate about the goodies of increasing a debt-ceiling, which is able to leave so much aside of the badies of raising a debt-roof, that from which the US, someday, sooner or later, will need to come down from.

And Edward Luce, in “It is stupid to believe that the Tea Party has no brain”, October 21 asks: “Can there be anything more idiotic than flirting with a voluntary sovereign default?” As a Latin American I would have to answer “Yes!” to that. And that would be flirting with an involuntary sovereign default.

Risk-weighted capital requirements are a prime example of quack policies, and FT ignoring it, of quack journalism

Sir, Sir Samuel Brittan writes that “Politics resonate with the sound of quack policies”, September 6.

A prime example of those quack policies, are the risk-weighted capital requirements for banks based on perceived risk, lower-risk less-capital, higher-risk more-capital. These cause the banks to earn much much higher risk-adjusted returns on their equity when lending to “The Infallible”, the AAAristocracy, than when lending to “The Risky”, like the medium and small businesses, entrepreneurs and start-ups. And that of course distorts completely the allocation of bank credit to the real economy. 

Those capital requirements are not “based on evidence”, and do not stand up to scrutiny. As to the empirical evidence, this would point in the opposite direction, as all major bank crises have always resulted from excessive exposures to what is perceived as “absolutely safe”. As for the analysis that lies behind, that is as mumbo-jumboish as you can find.

Brittan holds that such quack policies “overlook the benefits that people derive from the discouraged activities”. Indeed the benefits for the real economy, of the banks providing access to “The Risky”, in competitive terms, are completely overlooked.

Brittan also hold that such quack policies ignore the substitutes that are found and can be as harmful as the original. Indeed, by allowing the banks to earn such high expected returns on equity on what is “absolutely safe”, they might lend it too much on too lenient terms, and so the safe havens can get get to be dangerously overcrowded, like what happened to AAA rated securities in the US, Spanish real estate, Greece and other “infallibles”.

But I must say that for the Financial Times to ignore such regulatory quack, for so long, even when I have written you over one thousand letters about the problem with these regulations, that could also classify as quack journalism.

In order for “Game Changers” to play out their role, the rules of the game need to be fair

Sir, Sir Samuel Brittan surprises us presenting the so simplistic view that “There is nothing wrong with the US economy that a measure of redistribution towards both the less well-paid and public services would not put right” “Yes, productivity matters – but it is not everything” August 23.

I would ask him, what about a little redistribution, in ‘the Home of the Brave’, of bank credit from the AAAristocracy to “The Risky”, to the medium and small businesses, the entrepreneurs and start-ups? Would that not be needed?

And, in order for that to happen, and I explain it again, banks must be required to hold the same amount of capital against loans to both groups, so that both groups stand an equal chance to deliver risk-adjusted rates of returns on bank equity.

While banks are allowed to hold less capital–equity, when lending to “The Infallible”, that is who they are going to lend to… and the real economy and the productivity will suffer as a consequence.

And that will happen no matter how much the US wants to capitalize on opportunities such as those presented by McKinsey in “Game Changers”. You see, in order for the “Game Changers” to play out their role, the rules of the game need to be fair.

Greece: “I am not going to pay you”. Europe: “Then you’re out of the eurozone”. Greece: “So what?"

Sir, Sir Samuel Brittan writes that “The theory behind the euro was that the single currency would act as a harmonizing force”, “Why the eurozone will come apart sooner or later”, August 9.

I do not agree. To refresh my memory I went back to an article I wrote on the eve of the euro titles “Burning the bridges in Europe”. Reading it I conclude that, as I saw it then, it was very little about harmonizing something, and a lot about forcing Europe on Europe.

Brittan also believes that the most likely outcome is for “one or more of the peripherals to leave the eurozone” and links it to when Argentina “severed a supposedly unbreakable link with the US dollar”.

Again, I do not agree. Argentina was using a peso convertible to dollars, but the sustainable seigniorage value of for instance a new Drachma, should be so low that at least Greece would prefer to keep on using the euro, without asking for permission, which it does not have to do, just like Ecuador uses the US dollar without asking the US for permission.

PS. And by the way remember that the Greece mess was mostly caused by the Basel Committee, and European bank regulators, who approved that banks could lend to Greece against only 1.6 percent in capital, meaning allowing these to leverage their bank-equity, when lending to Greece, a mind-boggling 62.5 times to 1. Neither the banks, like those of Cyprus, nor Greece, could or should have been expected to be able to resist such temptations.

Central bankers, more than setting targets and aiming, should make sure their objectives can be reached.

Sir Samuel Brittan wishes for the Bank of England to state their objective rate for nominal gross domestic product under which they will keep interest rates low, “The real target that Carney should be aiming for” July12.

That is all fine, if low interest rates were all it took to achieve that objective, but is it not! 

As is, with banks instructed by regulators to extract profits from the past, by lending to “The Infallible” against very little capital; and not lending to the future, “The Risky”, by means of requiring banks to then hold much more capital, the real economy will not be able to achieve non-inflationary growth, unless, miraculously, bureaucrats get all other incentives absolutely right.

Getting rid of these immoral and stupid risk-adverse regulations that is what Carney and his colleagues should be doing, but, admitting they were so wrong, might be requiring too much humility of these besserwisser bureaucrats.

Authorities must learn to contain their desires to help and to meddle

Sir, Sir Samuel Brittan writes “How we can reconcile this general wisdom [that we do not know enough] with the desirability of giving individual officials definite objectives is an unsolved problem”, “Modern economics for the diligent seeker of truth”, May 31.

Precisely, it is an unsolvable problem, and that is why we need our authorities to contain themselves designating individual officers to do anything not really knowing what they are doing, no matter how much they all desire it.

Just look at what happened when the authorities designated the Basel Committee to eliminate bank crisis and those thereto nominated, not knowing what they were doing, set up a system of capital requirements for banks which guaranteed that next time when a bank crisis resulted, because of excessive exposures to what was perceived as “absolutely safe”, the origin of all bank crisis, we would find all the banks standing there naked or with very little capital to cover themselves up with.

Current capital requirements for banks represent, for the risky real economy, the biggest source of deflationary bias.

Sir, Sir Samuel Brittan, in “Forget trying to change Germany – or any other country”, April 5, in reference to what in his opinions are not sufficiently expansionary fiscal and monetary policies, for instance by Germany, writes that “the whole system has a deflationary bias when the world least needs it”. 

I will not argue against that but, let me assure you that the current capital requirements for banks, which so odiously discriminate against all what is not officially perceived as absolutely safe, represents, with respect to the real economy, that in which “absolutely safe” is absolutely absent, the mother of all deflationary biases. 

And if we cannot, as Brittan holds do much about what countries do with their own fiscal and monetary policies, and need to treat those as exogenous events, accepting or not the Basel Committee nonsense, is indeed a quite endogenous decision. The only thing needed is for one or two finance ministers to ask their regulators to explain the why of those capital requirements, and then to be prepared to act decisively upon receiving  any mumbo jumbo answers.

The willingness to take risks is the true locomotive of an economy

Sir, Sir Samuel Brittan ends his “Britain has a funny way of firing up the locomotive” of January 18 with “Keynes…was up against the self-destructive instincts of political leaders, who transferred home truths about family budgets to wrong-headed principles for running national economies.” 

Indeed, just as I am up in arms against the self-destructive instincts of bank regulators, and who transfer home truths about individual risk avoidance into wrong-headed principles for our banks. 

Sir, again, for the umpteenth time, if you know all bank crises have been caused by excessive exposures to some erroneously classified as absolutely safe, why on earth, as Basel regulations require, need banks to hold much more capital when lending to “The Risky” than when lending to The Infallible? 

It is any risk-taking austerity that most causes a nation to stall and fall. The willingness to take risks that is the true locomotive of an economy. And that is precisely why we go to our churches to pay “God make us daring!” while ignoring that some besserwisser regulators have kept themselves busy castrating our banks.

The Western world dominance resulted from risk-taking. It’s stalling and falling is the result of regulatory risk-aversion.

Sir, Sir Samuel Brittan writes about “The long foreshadowed decline of western dominance” January 4.

The management of an investment portfolio always starts by ascertaining the clients risk tolerance: whether low (conservative), moderate or high (aggressive); and defining the portfolios primary investment objectives: conservation of capital, income generation, long-term capital growth or speculative capital gain. And for those most risk adverse, the investment mandates might be described in the following terms:

Risk Tolerance: Low (Conservative). The client’s principal objective is to conserve their investment by reducing the risk of loss of capital and thus volatility of portfolio. They are aware that capital risk can never be eliminated entirely, and that this type of investment will probably be subject to inflation risk. Typically, low risk strategies will comprise predominantly sovereign bonds and cash management investments, although the client may also be willing to accept some increased capital risk, for example through investment in other asset classes with higher yields and /or capital growth potential.

Primary Investment Objectives: Conservation of capital. To seek to minimize the probability of loss to principal over time by investing in relatively liquid instruments with limited price fluctuations. The client wishes to be in a position to realize the capital of his investment at any time. Products that protect notional at maturity but that may be worth less that the notional prior to maturity will not be suitable for clients with conservation of capital as their primary.

Sir Samuel Brittan knows very well that, in the long run, such risk adverse investment mandate, is doomed to dwindle the value of the portfolio into nothing.

And Sir Samuel Brittan must also know that the western world had become what it was, thanks to a lot of aggressive risk-taking searching for long term capital growth and speculative capital gains. And in its churches we could hear “God make us daring!”

But then suddenly, in June 2004, out of the blue, authorized by who knows who, the Basel Committee for Banking Supervision instructed the banks of Europe and America, with Basel II, to follow a low risk and capital conservation investment strategy. And those instructions were given by means of allowing banks to leverage immensely more their equity with exposures to “The Infallible” than with exposures to “The Risky”. And of course that zapped completely the vitality of the western economies.

I can hear the standard objection: “What do you mean Kurowski? The banks collapsed because they took on excessive risks, not because of too little risks” And again I must clarify: No! The banks took on excessive exposures to what was officially deemed as absolutely not risky, and that is an entirely different matter than taking risks. Absolutely every asset that has created the current bank problems were assets considered absolutely safe and assets and which required the banks to hold only 1.6 percent in capital or less.

And so friends, if we do not restore urgently the capacity of our banks to finance what is risky we, in the Western world, are also doomed to dwindle into nothing. And Basel III does nothing of that sort, on the contrary it also introduces liquidity requirements based on perceived risk.

The financial crisis 2007-08 should have dealt a fatal blow to bank regulations, not to economic liberalism.

Sir, Sir Samuel Brittan in “It is no time to give up on economic liberalization” December 21, writes about “the traumatic event… the financial crisis… 2007-08 administered a fatal blow to economic liberalism”. 

That is only because the amazingly distortive role of bank regulations in generating this crisis has been completely ignored, or silenced. If not, the financial crisis of 2007-08 would not have even remotely signified a fatal blow to economic liberalism, but would indeed have dealt a fatal blow to the crazy regulatory paradigms used by some overly wimpy bank regulators. 

The Basel Committee, primarily with Basel II, imposed on the banks capital requirements based on perceived risks which were already cleared for by the banks and the markets, and completely distorted the financial system. 

As a consequence banks were allowed to earn a much higher expected risk-adjusted return lending to “The Infallible” than when lending to “The Risky”. And, as anyone should be able to understand, at least if allowed to understand it or no other agenda stands in their way, that has absolutely nothing to do with the free markets that economic liberalism promotes.

Sir Samuel Britain, here is what Lord Keynes would shout from his grave, if only he could.

Sir, Sir Samuel Britain writes “I have no idea what Keynes would say but I can hear him turning in his grave” “British economic policy echoes Habsburg decline”, November 23.

May I suggest the possibility that Lord Keynes would desperately shout out the following from his grave, if only he could: 

“You fools you have to make banks allocate resources to the most profitable projects which create the most growth which create the most jobs, instead of having these allocating resources to what requires them to hold the least in capital, in order to produce the highest returns on their equity.”

When a nation starts giving more importance to guarding what it has, and to assure their banks lend to “The Infallible”, than about what it can get by allowing their banks to lend to “The Risky”, like small businesses and entrepreneurs, it stalls and falls. The scarcity that currently most threaten our nations is that of pure un-distorted risk-taking.

How can bank regulators think we are going to be safer by overpopulating safe havens?

Sir, Sir Samuel Brittan, August 31, from his desk, urges, “Come on Bernanke, fire up the helicopter engines”, and drop some money on the economy, without it having to go through the banking system. 

What a lovely idea, but, unfortunately, that money would too soon get trapped in the banks, and where current regulations would only make it available, as carbs to those perceived as not risky to grow more obese on, and not to those considered “risky”, like our small businesses and entrepreneurs, as proteins for muscle growth. 

And so, No! Before you do anything, be it QEs, fiscal deficits, or helicopter droppings, make sure you get rid of that silly regulatory discrimination against “risk”, and which is present in the current capital requirements for banks. That discrimination is placed on top of all other discriminations based on risk, and those we know, are not that few, especially in these uncertain times. 

Come on Bernanke, and all you other regulators, we are not going to be safer by overpopulating the currently safe havens… and if there are to be any helicopter droppings, please, be enablers, and make sure these happen over what is perceived as risky land.

Here is when I started, got hooked, on the subject of bank regulations 

My 2019 letter to the Financial Stability Board

It is of no use pouring water on a drowning plant

Sir, Samuel Brittan writes “You don´t need to be a lefty to support Krugman” June 8. Of course not! But, supporting aggressive government spending to remedy a recession produced by a crisis before eliminating the cause for it, is just throwing fairly good money after really bad. 

This crisis resulted from the imposition of capital requirements for banks which discriminated based on perceived risk, and created obese bank exposures to whatever was officially deemed as not risky and anorexic exposures to what is officially deemed as risky… and that discrimination is still in full effect.. especially when bank capital is more scarce than ever.

Too much longing for stability creates the perfect storm conditions for instability

Sir, Samuel Brittan refers to “artificial suppression of volatilities in the name of stability” “The follies and fallacies of our forecasters” May 27. That is precisely what as an Executive Director of the World Bank I was referring to when, in May 2003, in pre-Basel II days, I told a large group of regulators gathered for a risk-management workshop at the World Bank, the following: 

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later. 

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

The regulators did not understand what I was talking about… mostly because they wanted so much to believe in forever stable banks.

PS. As you can see here, the link to Brittan’s article is gone.

And, what comes after in risk-weight targets?

Sir in reference to Samuel Brittan´s “What comes after inflation targets” July 2 I just wish to remember that we also need to remember to change bank regulations targets.

According to an explanatory note issued by the Basel Committee on how the current risk-weights used to calculated the capital bank requirements were set, these were based on a “confidence level of at 99.9%, meaning that an institution was expected to suffer losses that exceed its level of tier 1 and tier 2 capital on average once in a thousand years.

Not that we should increase that confidence level, since what it did was only to drive the banks into an excessive and very dangerous over-exposure to what was perceived as having low-default-risks… precisely that stuff that bank crisis are built from.

We had a monstrously dumb and stupid, government failure

Sir, Samuel Brittan in “A credo for a revived capitalism” May 7 reminds us that we need to discuss more about “government failure”. He is absolutely right.

In October 2004, as an Executive Director of the World Bank, I who am not an investment banker, nor a financial regulator, presented at the Board a written statement were I opined: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

And long before that and during my whole term as an ED I repeated, as much as I could, bordering on annoying, that the ratings issued by the credit agencies were just a new breed of systemic error to be propagated at modern speeds… and that we should not follow the money but follow the triple-As.

The real question now is what keeps the world from listening when the innocent child screams out “the emperor is naked”?

Look at the European governments, accepting the dictates of the Basel Committee and allowing their banks a 62.5 to one leverage when stocking up on Greek debts and alike… if that is just not a monstrously dumb and stupid government failure, what is?

The flaws of the euro were part of the plan for a Europe

Sir in November 1998 I expressed clearly my surprise on Europe entering a monetary union before being a political union and especially about there not being a single word on how to proceed if any country wanted to retire from the Euro. But even though the article described exactly the difficulties that are now being confronted I titled it “Burning the bridges in Europe” because I felt it was an effort to bluff history and generate the conditions that would make a political union unavoidable.

That is why I do not agree with Samuel Brittan when he argues “Greek spotlight on a flawed project” February 19. All possible risks with the euro must have been known by its promoters, when even I knew them, and so this euro project was launched with the clear purpose of creating a political union... and, whether it fails or not, is yet to be seen.

Do I hope the burning of the bridges produces the expected results? Of course I do? Do I believe they will? I am not sure... but it is sure giving Europe a good run for its money.

Perfection is indeed the enemy of the good

Sir, Samuel Brittan in “We do not prosper by income or happiness alone” September 4 writes about Amartya Sen book “The idea of justice” in which the author proposes, among other, the “the piecemeal removal of specific injustices in the absence of an ideal society." That is absolutely right. 

In my book “Voice an Noise”, 2006, where I described some of my experiences as an Executive Director at the World Bank I held that, at sixty years of age, that institution “should perhaps be renewing its vows in order to move up from “knowledge” into wisdom and instead of trying to advance impossible agenda like justice and social responsibility might do better settling for fights much easier to monitor, such as one  against injustices and social irresponsibility. 

Also in El Universal, Caracas Venezuela, 2004 in “McPrisons” I wrote: “Justice is something very difficult to understand with precision, since it is situated along a continuum that becomes finite only when it reaches Divine Justice. 

On the other hand, injustices are much easier to identify and, in our countries, prisons themselves represent one of the greatest injustices. In terms of the use of scarce resources, as an economist I am convinced that programs of Judicial Reforms would be better served by improving prisons than by investing in Supreme Court buildings.”

It was more comfy to ignore the warnings

Sir Samuel Brittan in Economists shuffle the deckchairs August 7, quotes a letter to Her Majesty written by Professors Tim Besley and Peter Hennessy stating “many people did foresee the crisis” but clarifying that “no one foresaw the form it would take and its timing, onset and ferocity”. This sure sounds to me as a lame excuse for inaction, like a mother having been warned of the dangers of leaving her child alone at the side of the road complaining that no one told her exactly when and where and by whom her child would be overrun.

Indeed plenty of persons warned about the dangers in quite clear term and I myself wrote in a letter published by FT in January 2003 saying that “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds.”

If there is an explanation for why the warning were unheeded it is because of too much utterly misplaced solidarity among peers and the fact that we allowed our financial regulations to be captured by a small group of fanatics in Basel.

The debate has been sequestered by the machos and the wimps.

Sir Samuel Brittan seems to divide us economic debater between the machos, those who hold that this is no time for hesitance, better too much stimulus than to little and that we should forget about how we are going to pay for it all; and the wimps those, who urge more caution. In my case I confess that I often find myself among the latter, though mostly as a reaction to the runaway machismo of the machos. “Economic dominoes are still falling” February 13.

The truth, which as usual lies somewhere in the middle, is that we all should be very careful machos, and by which I imply we should stimulate a lot but make sure that every cent of stimulus counts.

In this respect (once again) I wish to point out that there are other issues that need to be looked at, such as the interest rates charged on credit cards.

To stimulate consumption placing compromises of a trillions of dollar on the shoulder of future generations of tax payers while at the same time allowing credit card companies to charge 17% interest rates in an economy where inflationary expectations are low, has nothing to do with machos or wimps, only with plain stupidity.

I am therefore proposing that the US government and the Congress should limit the interest rates that can be charged on credit cards to something like 5% and perhaps, for a year, as a partial compensation, pay the creditors an additional 3% on any balance financed. That stimulus cost would amount to a meager 30 billion dollars, per each trillion of credit card debt.

Doing it would put real money in the pockets of the real consumers and simultaneous work at solving the next wave of toxic assets soon to hit the markets.