Privatizations of public services, which could have been very good, just ended up as cozy crony statism deals.

Sir, Hannah Roberts discussing privatizations in the Italy of 1990’s writes, “The state turned to private entrepreneurs, offering favourable terms to extract the maximum possible capital from the sale”, “Inquest on Italian privatisation” September 5.

I do not know much about Italy, but that describes perfectly the problem from which we in Latin America suffered a lot when many of our public services were privatized. The concessions, instead of being awarded to those who offered the best and cheapest services to the users, were awarded to those who offered the most immediate income to the redistribution profiteers of turn.

The government got the money, and we consumers were set up to have to repay all that money, at high expected return on equity rates, with higher tariffs or prices. It was, as I so often publicly denounced it, a hidden taxation through privatization.

Andrea Cioffi, undersecretary at the ministry for economic development and a Five Star senator is quoted with, “There has always been a tendency to favour big companies, backed by pressure groups. Italy in the 1990s was like Yeltsin’s Russia when public companies were given to the oligarchs. Everyone was looking out for their friends, rather than the public interest.” 

Sir, twice is “crony capitalism” mentioned in this piece. When are we going to use the correct term of crony statism?

@PerKurowski

Crony capitalism, which is really crony statism, includes many crony relations with central banks and bank regulators

Sir, Mohamed El-Erian writes about Jackson Hole meetings 2017: “The symposium left open questions for markets that, given very profitable adaptive expectations, are conditioned to rely on central banks to boost asset prices, repress financial volatility and influence asset class correlations in a way that rewards investors and traders more.” “Yellen and Draghi had good reason for Jackson Hole reticence” August 29.

So instead of relying on the real economy, Mohamed El-Erian, and I presume all his colleagues operating in the financial markets, rely more on what central banks do.

That is so sad, especially since the risk weighted capital requirements for banks, hinders all central bank stimuli to flow where it should. We now have buyback of shares, dividends financed with low interest rate loans, house prices going up, but SMEs and entrepreneurs not getting their credit needs satisfied because the regulators feel these are "Oh so risky!"

El-Erian reports: “Janet Yellen, chair of the US Federal Reserve, and Mario Draghi, president of the European Central Bank — [told] politicians about the importance of financial regulation”

That only happens because politicians have not dared to ask regulators questions like:

Who authorized you to distort the allocation of bank credit in favor of those perceived, decreed and concocted, as “safe”, like sovereigns and AAArisktocracy, and away from the “risky”, like SMEs and entrepreneurs?

Where did you find evidence that those perceived as risky ever caused major bank crisis? As history tells us, these were always, no exceptions, caused by unexpected events, like those ex ante perceived as very safe turning up, ex post, as very risky. 

PS. Do bankers love these crony relations? You bet! Being able to earn the highest expected risk adjusted returns on equity on what is perceived as very safe, must be a wet dream come true for most of them. And besides, by requiring so little capital, and therefore having to serve much less any shareholders’ aspirations, there is much more room for their outlandish bonuses

@PerKurowski

Our “free market capitalism” is just the frosting on a statist cake baked by bank regulators in 1988.

Sir, Yuval Noah Harari writes: “Since 1989 elites in the west have come to believe in the “end of history” narrative, according to which liberal democracy and free market capitalism have won over all rival social systems, and the world is therefore bound to become a global community managed through free markets and democratic politics.” … However, since the global financial crisis of 2008 people all over the world have lost faith in the liberal recipe.” “At last, liberals are waking from a long dream” January 7.

That is indeed the conventional version, but “The truth is, so many don’t understand what’s going on in the world.”

In 1988 and in 2004, with Basel I and Basel II, regulators introduced risk weighted capital requirements for banks which allowed banks to leverage almost limitless when lending to the Sovereign, much, like 60 to 1, when lending to the safe AAArisktocracy, and only about 12 to 1 when lending to the “risky” We the People, like to SMEs and entrepreneurs.

Harari opines “the coming years might well be characterised by intense soul-searching and by attempts to formulate new social and political visions. Indeed, liberalism might yet reinvent itself”

If that is to happen, then the first order of the day for those aspiring to qualify as elite, is to understand how they so completely missed out on how these regulations would distort the allocation of bank credit to the real economy, foremost favoring governments.

Elite, where do you think the western world would be had these regulations been applied to banks during the 600 years before the Basel Accord?

Elite, what do you think Medici and many other bankers would have thought about 0 percent risk weight assigned to the Sovereign?

Elite, do you think the subprime or the Greek mess would have happened if banks were required to hold, for instance, 10 percent in capital against all assets? 

Elite, do you understand how this regulation decrees inequality?

Elite, as is don’t you think crony statism is a more clear definition than crony capitalism?

Elite, why do you think I cannot get an answer from regulators on some very basic questions?

Elite, why do you think the Financial Times will not publish this letter?

@PerKurowski

Why is obvious crony statism referred to as crony capitalism?

Sir, I refer to Martin Wolf’s “Why Xi cannot succeed with his reforms” December 14.

In it, Wolf quotes the following from Minxin Pei’s “China’s Crony Capitalism”: “The emergence and entrenchment of crony capitalism in China’s political economy, in retrospect, is the logical outcome of Deng Xiaoping’s authoritarian model of economic modernisation… because elites in control of unconstrained power cannot resist using it to loot the wealth generated by economic growth.”

But “Capitalism” (at least according to Wikipedia), “is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. In a capitalist market economy, decision-making and investment is determined by the owners of the factors of production in financial and capital markets, and prices and the distribution of goods are mainly determined by competition in the market.”

Sir, so why does it refer to “crony capitalism” when it is clearly much more a case of “crony statism”? Could it be that the “unconstrained power of the elites” also cover the terminology we are to use? Like for instance when references are made to our economies being under the yoke of “neo-liberalism”, all while bank regulators gladly risk-weigh Sovereigns with 0%, and We the People with 100%. Or like when intrusive and complex bank regulations are mentioned to have happened in a period of "deregulation".

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

@PerKurowski

Is “crony capitalism” the right term for what’s going on? Crony statism seems a much more precise label.

Sir, you write correctly: “If political whim means companies are to be blocked, bullied or bribed out of investing where they see fit, a natural part of the functioning of the global economy will be subverted…. The idea of a world in which capital is allowed to flow freely to its most productive location is increasingly under threat… When the capital development of a country becomes the by-product of a game of political bargaining, the job is likely to be ill done.” “Politicizing investment makes the world poorer” December 3.

Indeed most of us dislike any special favoring arrangements between some private sector agents and some public sector representatives, but Sir, let me ask you two questions:

Why do you keep silence when, with their risk weighted capital requirements for banks, regulators do not allow credit to flow freely to its most productive location, just in order to have these flow to where in their petty minds banks can, at least in the very short term be more safe?

And when you know regulators set the risk weight for the sovereign at 0%, while We the People, like SMEs and entrepreneurs, are hit with one of 100%; which translates directly as regulators helping government bureaucracy to have easier access to bank credit than that of the private sector, instead of crony capitalism, is that not really more a case of outlandish crony statism?

PS. Ask the Greeks if the low capital requirements for their government that allowed it to take on so much debt made them any richer?

@PerKurowski

Trump, though there’s reason for concern, shares some basic qualities that made the “Final Five” and America great.

Sir, Gillian Tett describing a clearly inspiring show by the US Olympic women’s gymnastics team, the “Final Five” asks: “Do they demonstrate discipline and ambition? Undoubtedly: if you want to teach a kid about triumph in the face of adversity Simone Biles’s life story is a good place to start: she overcame the challenges of a very tough childhood to win five Olympic medals” “What Trump can learn from the Final Five” November 12.

But at least in this respect Trump, though born with a silver teaspoon in his mouth, has certainly already demonstrated a willingness to take risks, to make mistakes, to try it again, and that go-get-it spirit that made the Five Final, and that helped make America what it is. If anything some could hold Trump has demonstrated a bit too much of those qualities.

Personally I pray Trump, as a President will want to reignite the building of America based on those qualities, and not just based on unproductive cronyism, which is a much too frequent reason for why some less deserving make it “Great” though not really the Final Five.

PS. Whether popular votes or electoral votes, no winning side has the right to ignore the other almost-half, though unfortunately it seems both sides would want to.

In banking, by means of its regulations, the governments are the biggest receivers of crony capitalism gifts.

Sir, I fully agree with Martyn Roetter in that “An honest economics profession should help defend against crony capitalism, not act as an apologist by obfuscating its reality and denying its existence.” “Fighting the cronies calls for honest economists” October 21.

And when looking for the crony relations in banking, all you need to do is to follow that which has been awarded the regulatory blessing of lesser capital requirements. Clearly, since that would be the sovereign, awarded an amazing zero percent risk weight, the governments are de facto in that sector, the biggest exponents and beneficiaries of crony capitalism.

Requiring more bank capital for some exposures than for other clearly distorts the allocation of bank credit to the real economy. And so an honest economics profession should also be denouncing that… but most economists keep mum on it… perhaps because they do not even understand it.

Financial Times, for unexplained reasons, has been extremely reluctant to report on such crony bank regulatory relations… would this be crony journalism going hand in hand with crony capitalism? 

@PerKurowski ©

“Capitalism for hyenas” might be a more accurate description than “capitalism for friends”

Sir, I refer to Chrystia Freeland’s “Puttin’s populist bluster belies the loneliness of the cynic” December 29.

If for instance Andres Schipani would like to write an up to date report on Venezuela and Maduro, he would have to change almost nothing except for some names and regional references… especially now when even Cuba, as was to be expected, has also turned out to be a fair-weather ally.

But, when referring to the crony capitalists that flock around the leaders, I would perhaps disagree with the term “capitalism for friends”. In Venezuela at least, it is really not friends who are sharing those oil revenues which now represent 97 percent of all this nation's exports… it is much more something like “capitalism for hyenas”

Is Thomas Piketty, with his “Capital” unwittingly working for the big time Oligarchs and Plutocrats?

Sir, I refer to Gillian Tett’s “The lessons from a rock-star economist”, April 26.

Anyone wanting to tax more wealth and income, in order to make up for an inequitable distribution, without first identifying and remedying the causes of such inequities is, de facto, working to increase the wealth and power of the big time Oligarchs and Plutocrats, because if no other changes, to them is where all those new taxes paid by the other wealthy is going to go, before the end of the day.

And I have not really understood the reason for the great hullaballoo around Thomas Piketty´s 685 pages long Capital in the Twenty-First Century. Of course it contains many interesting arguments but… what is really its new news? Gillian Tett might be quite right when she says “it has forced Americans to confront a growing sense of cognitive dissonance”… though perhaps one could equally describe that as having created the opportunity for some to exploit a growing sense of cognitive dissonance.

The book is based on a gross simplification that forces reaching the wrong conclusions. Already in the flap cover we read: “The main driver of inequality-the tendency of returns on capital to exceed the rate of economic growth-today threatens to generate extreme inequalities…But economic trends are not acts of God. Political action has curbed dangerous inequalities in the past, Piketty says, and may do so again”.

Much more accurate, and meaningful, would have been to start the analysis by asking … why is there a tendency of returns on capital to (in between crises) to exceed the rate of economic growth”. Most, if perhaps not all of those causes, are to be found directly linked to one sort of rent seeking or crony capitalism, something which clearly involves the hand of politics and governments, and something which has little to do with real capitalism. But that might not have been a welcomed conclusion to those who want to work at both ends… where the inequalities and the headaches are created and where the aspirins are handed out.

And of course to me, when Piketty writes “there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability” he is totally wrong. It was bad bank regulations which basically permitted banks to work with less and less capital, and the exaggerated importance given to the financing of home ownership, which caused the nation’s instability.

And when Piketty writes: “one consequence of increasing equality was virtual stagnation of purchasing power… which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks… freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms”, it frankly reads like a simple provocateur pamphlet. By the way “increasing generous terms”? What a laugh! He clearly never saw the terms of the bad mortgages awarded to the subprime sector. 

And when Piketty writes “the financial crisis as such seems not to have had an impact on the structural increase of inequality”, we are left with the question of … why do you think that is so Professor?, since he seems to wish to ignore the role of Tarp and QEs in saving the wealth, at the price of even increasing the inequalities.

What can I say? I just hope for the sake of its many fans, that by next year they will not see in bookstores a bestseller titled “How we masterfully launched Piketty’s Capital”.

PS. I have read about one third of the book jumping from here to there. If I find something that will make me change my opinion while reading the rest, I will let you know.