High interest rates on sovereign bonds are often just vulgar kickbacks offered by corrupt regimes.

Sir, Jim Sanders correctly points out “Where the money from sovereign bonds goes within developing country governments is rarely, if ever, the subject of reporting in the financial press. Nor does there appear to be a regulatory regime in place to monitor how money raised from bond issues is spent.” “Emerging market bonds are a risky business” March 19.

Of course not, way to often lenders, attracted by profit opportunities, quite on purpose turn a blind eye on that, much preferring the bliss of ignorance. 

Just as an example in May 2017, Goldman Sachs handed over about US$800 million to the notoriously corrupt, criminal and human rights violating government of Venezuela, in order to obtain $2.8billion Venezuelan bonds paying a 12.75% interest rate, which if repaid would provide GS with about a 42% yearly return, 2.000% more than what US pays.

It is clear that when it comes to our sovereigns taking on debt, that perhaps our children will have to repay, we citizens much more than credit ratings need ethic ratings; and a clear definition of what should be considered as odious credits, and the consequences for any credit that ends up qualified as such.

Personally I consider a level of sovereign debt that allows for contracting it in emergencies at reasonable rates, as a strategic asset, which no one should take away from future generations, without overwhelming reasons.

@PerKurowski

Venezuela poses a unique opportunity, for all citizens of the world, to clearly define what should be considered as odious credits, and how these should be treated.

Sir, Colby Smith and Robin Wigglesworth quote a holder of Venezuelan debt with: “The ultimate objective is to reach a point where [Venezuela] regains market access at market-determined terms without the risk of renewed default”,“Venezuela debt fight pits veterans against hot-headed newcomers” March 13.

It is absolutely clear Venezuela needs much financing to reconstruct its entire run down basic infrastructure but, as a citizen, having seen how much public indebtedness goes hand in hand with corruption and waste, and how it so often makes it harder for the private sector to finance its needs, I would not mind Venezuela not reaching that “ultimate objective” for a long-long time, especially not as long as the government already receives directly all oil revenues.

Our Constitution clearly establishes that all “Mineral and hydrocarbon deposits of any nature that exist within the territory of the nation… are of public domain, and therefore inalienable and not transferable” and yet 99% of the debt it contracts is implicitly based on its creditors having access to the revenues produced by extracting Venezuela’s non-renewable natural resources, mainly oil. 

So now, the least our legitimate creditors could do, is to help us extract oil; and to that effect the following is a message I have been tweeting for about two years: “For Venezuelans to be able to eat quickly, starts by quickly handing over PDVSA’s junk to its and Venezuela’s creditors, so that they quickly put it to work, to see if they are able to quickly collect something, so to pay us citizens, not bandits, some oil royalties quickly”

But, that said, what is most important is to classify all Venezuela’s debts. Many of these were not duly approved; others had a large ingredient of corruption and lack of transparency and so all these must be scrutinized in order to establish their legitimacy.

For example, when Goldman Sachs in May 2017 handed over $800 million cash in exchange for $2.8billion Venezuelan bonds paying a 12.75% interest rate, to a notoriously corrupt and inept regime that was committing crimes against humanity. Especially since Lloyd Blankfein cannot argue an “I did not know”, that to me is as odious as odious credits come.

Sir, it behooves all citizens of the world to use this opportunity to set up an adequate defense against governments anywhere, mortgaging their future with odious credit/odious debts.

That also includes stopping statist regulators from distorting with a 0% risk weight the allocation of bank credit in favor of the sovereign, against the 100% risk weighted citizens. 

@PerKurowski

Aren’t all nations, one way or another, tarred with a similar brush of nationalism?

Sir, Harriet Agnew and David Keohane report that, on the centenary of the end of the First World War, Emmanuel Macron railed against nationalism as a “betrayal of patriotism”, in an implicit rebuke to his US counterpart. “Macron attacks nationalism in Armistice Day rebuke to Trump” November 12.

Macron said: “By saying ‘Our interests first. Who cares about the others?’ we erase what a nation holds dearest, what gives it life, what makes it great, and what is essential: its moral values.” Is that not beautiful? Of course it is!

My problem though is that precisely these days I have been writing that the ending of the First World War, and the Versailles treaty, should provide an opportunity to reflect on the armistice conditions that are imposed on sovereigns, when they have to capitulate because of excessive loads of public debts. This especially because it is usually not only the defeated sovereign’s fault. 

If we look behind most odious debts, we will find surely find odious credits. In the case of eurozone sovereigns, like Greece, odiously dumb regulations too. Assigning a zero risk, as the European Commission did to a nation that is much indebted in a currency like the euro, which is not really its domestic (printable) currency, made absolutely no sense. That meant for instance that German and French banks could lend to Greece against no capital at all, and so, naturally, these banks could not resist the temptation of offering Greece too much credit, and Greece could not resist the temptation of taking on too much debt.

But what happened? The recent armistice conditions imposed by EU authorities required Greece to take on debt, much of it in order to repay German and French banks, leaving it with about a €345 billion debt, more than €30.000 per each Greek, in a currency that as I mentioned is de facto not their own. 

Sir, so I ask is that not just another Carthaginian peace? Viewed this way, no matter how right what Macron preaches is, does he really have the right to throw the first stone on “moral values”? Aren’t all nations, one way or another, tarred with a similar brush of nationalism?

Sir, this is no minor issue. Since Italy would most probably not walk the plank like Greece, the future of the Euro, and of the European Union is at stake… and that is something that those who might rightly defend the Remain against the Brexit, should at least out of pure precaution consider.

@PerKurowski

The regulators are responsible for the doom loop between Italy’s heavily indebted public finances and its banks

Sir, David Crow and Rachel Sanderson write: “Filippo Alloatti, senior credit analyst at Hermes, said that [Italian] banks were “super long” on Italian government debt, which accounts for between 13 and 15 per cent of their total assets… Such heavy exposure has revived the spectre of the doom loop, which describes the inextricable link between Italy’s heavily indebted public finances and its banks”, “Italy’s lenders feel heat as doom loop fears return” October 12.

In a letter published by Financial Times in November 2004 I asked: “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?”

And one of the most surprising things for someone like me who plays no formal role in the regulation of banks is why the world did not object to the horrors of banks regulators that, with Basel I in 1988, for the purpose of risk weighted capital requirements, assigned a risk weight of 0% to the [friendly] sovereign and one of 100% to the citizens.

That this regulation that so clearly favors crony statism was introduced a year before the Berlin Wall fell is evidence of how much can go wrong, if we allow unelected officials to engage in groupthink within a mutual admiration club.

Central bankers and regulators around the world have, with their especially low capital requirements against sovereigns, been setting our bank systems up to an especially monstrous crisis, and still they congratulate themselves for more resilient banks.

Just like they have set us up, to an equally especially monstrous disaster in waiting, with their especially low capital requirements for banks financing the purchase of houses; which has transformed houses from being safe homes into risky investment assets.

Central banks have of course made it all so much worse by keeping ultra low interest rates, and pouring huge amounts of QE liquidity on this structurally faulty regulatory fabric.

Our banks have been painted into a corner. What would happen if regulators suddenly announced that the risk weight of the sovereign had to increase from 0% to a meager 1%? 

If Italy goes down the tube will financial authorities lay the full blame on Italy, just as they did with Greece after they doomed it with that odious 0% risk weight?

Sir, you know I feel the Financial Times has kept complicit silence on all this.

@PerKurowski

Special tax breaks for investment in O-zone is another source of distortion… and of gaming.

Sir, Gillian Tett writes that Steven Mnuchin the US Treasury secretary [told] luminaries such as Lloyd Blankfein, John Paulson, Howard Marks and Bill Ackman [to] put money into “development” projects in exchange for massive tax breaks.” “Populism is the true legacy of the crisis” August 31.

For a starter, given the presence of Goldman Sachs “luminaire” Lloyd Blankfein there I wish Mnuchin had also mentioned imposing special confiscatory taxes on any profits derived from financing regimes that notoriously violate human rights... namely giving odious credits.

As to tax breaks for investment in special opportunity zones O-zone, my objection would be the same like what I have against the risk weighted capital requirements for banks. It distorts the allocation of credit/investment to the real economy and it can be gamed.

@PerKurowski

When will the world stop referring to those giving odious loans, odious credits, as investors?

Sir, the Lex column “Venezuela debt/Maduro: crypto communist” of August 23 writes: “It beggars belief that a country with the world’s largest oil reserves has failed financially…when prices for oil, its sole commodity, fell. Borrowing has filled the gap… Investors, including the asset management arm of Goldman Sachs, can look forward to a lengthy default”

In your editorial of August 22, “The desperate plight of Maduro’s Venezuela” you wrote: “Much of the world, especially supporters of “Chavismo” from the Panglossian left, has been disgracefully silent about Venezuela’s crisis for too long. The country is all but a failed state. As a drug-trafficking hub and the source of a huge exodus, it is already an exporter of instability.”

And I must ask when is the world going to stop referring to those who help finance regimes that are notoriously inept or/and commits awful violation of human rights as “investors”, and not as the lowly and dirty financiers they are?

Is for instance financing the smuggling of drugs more morally reprehensible than financing a regime like Maduro’s? Would you ever dream of introducing to your family and friends one who had helped finance the construction of Auschwitz, as an investor?

Yes, credit ratings might be needed, but more does the world need ethic ratings. It is way past time the world begins to understand that most odious debt there is, has its origin in odious credits, and that we need a Sovereign Debt Restructuring Mechanism that takes that in consideration.

http://unsustainabledebtsustainability.blogspot.com

@PerKurowski

Ms. Janet Yellen, like other recent bank regulators who have just faded away, will leave the Fed without answering THE QUESTION

Sir, you write: “The Federal Reserve can take some blame for failing to see risks building up in the years preceding the global financial crisis. But perhaps more than any other major policymaking institution in the world, the Fed has acquitted itself well in the decade since”, “The unfortunate exit of an exemplary Fed chair”, November 29.

As you might suspect, I profoundly disagree. The Federal Reserve has yet not understood (or has been willing to acknowledge it) the fact that the “risks building up in the years preceding the global financial crisis” were a direct consequence of the distortions introduced by bank regulations, primarily Basel II, 2004.

If you allow banks to leverage almost limitless when lending to sovereigns, (like European banks lending to Greece); when financing residential housing; and over 60 times to one just because a human fallible rating agency has issued an AAA rating, that crisis, just had to happen.

And since capital requirements for banks have remained higher for what is perceived as risky than for what is perceived, decreed or concocted as safe, that odious distortion wasted most of the stimulus quantitative easing and low interest could have provided.

Over the last decade, how many SMEs and entrepreneurs have not gained access to that life changing opportunity of a bank credit, only because of these odiously discriminating regulations? Who can believe that America would have been able to develop as it did, if these regulations had been in place since the time of the pilgrims?

And now Janet Yellen, like other regulators have done in the recent past, will leave the Fed without answering us why banks should hold the most of capital against what is perceived as risky, when it is when something perceived very safe turns out very risky, that one would really like banks to have the most of it.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

Sir, thanks for all the help you have given me over the last decade, forwarding that question without fear and without favour.

@PerKurowski

Venezuela faces a restructuring between odious creditors and odious debtors, so it behooves us ordinary Venezuelans citizens to intervene and block any odious deals.

Sir, Jonathan Wheatley and Robin Wigglesworth when reporting on the surreal sort of restructuring of Venezuela’s debt by the equally surreal Maduro government write: “Venezuela is already a serial defaulter. It has defaulted on miners, oil companies and other enterprises whose assets it has seized without compensation. It has defaulted on unpaid suppliers to PDVSA, the national oil company. Most seriously, it has defaulted on its people, denying them access to basic foods and medicines, causing an epidemic of weight loss and turning injury or illness into a mortal danger.” “Venezuela bond repayments: dead and alive” November 28.

Sir, the creditors, if they had carried out any minimum due diligence, would have been perfectly aware their financing would not be put to any good use, so for me, all their loans, given only because of juicy risk-premiums or other profit motives, are just odious credits.

And the borrowers, knowing very well they were contracting that debt for no good purposes at all, defines all these borrowings to be odious debts.

So here we are Venezuelans citizens, with children, parents and grandparents dying for lack of food and medicines. Are we now just supposed to sit down and allow this restructuring to happen on whatever odious terms the creditors and the debtors agree on in a petit committee?

No way! As a minimum, for a starter, our General National Assembly not yet in exile needs to authorize our Supreme Court of Justice in exile, to take charge so as to at least determine what could be deemed to be bona fide, dubious, or outright odious credits.

https://teawithft.blogspot.com/search?q=odious+credit

@PerKurowski

A former Executive Director of the World Bank, for Venezuela (2002-2004)

Beware, nudging, like that done by bank regulators, can have very dangerous unexpected consequences

Sir, Tim Harford writes: “Professor Richard Thaler’s catch-all advice: whether you’re a business or a government, if you want people to do something, make it easy.”, “Thaler’s Nobel is a well-deserved nudge for behavioural economics” October 10.

Yes “making it easy” is great advice, but it is only truly helpful if what is made easier is really good for you… otherwise it could be outright dangerous… like nudging someone over a cliff.

Regulators, caring little or nothing for the credit allocation function of banks, foremost wanted these to avoid risks. To that effect they allowed banks to hold less capital against what’s perceived or decreed safe than against what’s perceived risky.

With that regulators allowed banks to easily obtain higher risk-adjusted returns on equity lending to The Safe than when lending to The Risky.

With that regulators dangerously nudged our banks into too much exposure to The Safe and too little to The Risky.

The result was a bank crisis because of excessive exposure to The Safe: sovereigns, AAArisktocracy and mortgages; and economic doldrums because of insufficient credit to The Risky: SMEs and entrepreneurs.

Sir, and so here we are, without most not even knowing about the odious regulatory nudging that was as is being done.

What rules do we have to impose on nudging to make sure it is done right?

https://teawithft.blogspot.com/2008/11/at-least-listen-to-joker-before-giving.html

https://teawithft.blogspot.com/2008/08/how-do-you-nudge-financial-times.html

https://subprimeregulations.blogspot.com/2015/12/professor-richard-thaler-do-not-give.html

@PerKurowski

Worse than odious debt that some might feel urgently needed, is odious credit that needs not to be given

Sir, Robin Wigglesworth writes: “An archaic, often-mentioned but never-invoked legal doctrine called “odious debt” could be tested for the first time in history in Venezuela should the regime be ousted from power.” September 12.

I feel that for us citizens, everywhere, even more important than the concept of odious debt, is to define a legal doctrine on “odious credit”, this for the simple reason that the first would not exist without the latter.

In other words, are we to hold an uneducated trying to survive day-by-day thug like Nicolas Maduro, to higher moral standards than those highly educated in Goldman Sachs’ who, if their education is worth anything, should be able to survive without financing badly masqueraded violations of human rights? I think no!

Sir, we do need a Sovereign Debt Restructuring Mechanism, urgently, but if such an SDRM is really to mean something good for the world, then the concept of odious credit has to be an integral part to it.

http://unsustainabledebtsustainability.blogspot.com/2004/04/odious-credit.html

@PerKurowski

The Venezuelan National Assembly, the real not the fake, needs to be careful it does not legitimize odious credits

Sir, Henry Foy, Robin Wigglesworth and Gideon Long report on how “Venezuela [Maduro] has invited international bondholders to negotiations over its foreign debt as Caracas seeks to mitigate the impact of US sanctions and survive a deepening economic crisis.” “Venezuela sets up talks on foreign debt” September 9.

Legitimate debt/credit, sort of legitimate debt/credit, more dubious debt/credit and clearly odious debt/credit composes Venezuela’s public debt. It behooves Venezuela, as well as all citizens in the world who could in the future face similar challenges, to make sure that in any negotiations here referred to, there are true representatives of the Venezuelan citizens, in order to make sure that differentiation occurs, and that there is no legitimation of debts that do not entirely merit it.

In this respect I hope the Venezuelan National Assembly, by voting, not by some finger-pointing appointments, selects who are going to represent it in any of these negotiations; and then formally notifies all interested parties of their names, that including all officials of the Paris Club.

Clearly those Venezuelan citizens representatives must present no conflicts of interest with either creditors or with those in government that have been involved with the “contracting” of such debt.

PS. What’s “sort of legitimate debt/credit”? That which is legitimate in legal but not in moral terms.

http://unsustainabledebtsustainability.blogspot.ca/2015/10/we-must-not-allow-vulture-funds-to.html

@PerKurowski

Odious debts, odious credits and odious regulations are all yin-yang elements of the financial sector

Sir, M Shepherd, when commenting on Alex Pollock's letter "Sovereign debt has a pretty bad record" August 16 writes that “All too often, debates about defaults on government bonds focus on the borrowers and neglect the lenders.” “The other side of the sovereign debt story”August 18.

Absolutely, and that is why when I write about odious public debt, like that contracted in Venezuela, I always follow it up with one about odious public credit, like those awarded to Venezuela.

But, of course I have to add a point. For instance the immensely excessive public debt in Greece would never have happened had regulators not, for the purpose of setting the capital requirements for banks, assigned Greece a zero percent risk weight.

Those regulators have not been held accountable either, among others because of the network solidarity FT has showed them … in fact they have been promoted to central banks… and our banking system still lives under the distorting thumb of risk weights.

@PerKurowski

Our dear George Banks, having anteceded the Basel Committee, would never have dreamt about current bank bonuses

Sir, Jonathan Ford writes: “As Andy Haldane of the Bank of England points out, there are few ways for banks to bolster their returns to shareholders. One is to loosen underwriting standards and so increase the riskiness of assets they invest in. The other is to squeeze the amount of regulatory capital they set against the investments they make.” “Banking bonuses ought to be dead and buried by now” August 14.

Haldane is wrong about the increase of riskiness of assets, to improve the return on equity that is of little and doubtful sustainable value (bankers have even been fired for that); but he is absolutely correct about the regulatory capital.

When current bank regulators were taken for a ride by bankers and convinced, like for instance with Basel II of 2004, to set the capital requirements against something rated AAA to AA at only 1.6%, meaning an authorized leverage of equity of 62.5, they allowed bankers to earn returns on equity beyond their shareholders’ wildest dreams, and this even after keeping for themselves huge eye-watering bonuses.

Place a 10% capital requirement on all bank assets and those bonuses would immediately begin to vanish in the air as a result of shareholders becoming again important to banks.

As a huge bonus for the rest of the economy, that would also eliminate the current odious distortion of bank credit in favor of “the safe”, sovereigns, AAArisktocracy and houses, and against the risky, SMEs and entrepreneurs.

PS. Here is a letter from George Banks III, after having been called a bankster.

George Banks (the first)

@PerKurowski

Should/will the holders of Venezuela’s “Hunger Bonds” have priority over the hungry?

Sir, John Dizard, in reference to the current financial difficulties of the state of Illinois points out that Judge Joan Lefkow of the Federal District Court in Chicago made the point of “Bondholders do not have priority over welfare recipients”. That according to a muni portfolio manager would signify that the judge “is starting the process of reprioritizing the primacy of debt service under state law and the state constitution.” “Illinois’ journey to junk credit is sending shockwaves through the muni industry” June 17.

Let me apply that to Venezuela. Would that judge order that those many Venezuelans, including children, who die because of lack of food and medicines would have the same pari-passu rights as the holders of what Ricardo Hausmann has named “Hunger Bonds”?

It really does not sound so farfetched, or unjust, considering that the holders of those “Hunger Bonds” must be, as reflected in the risk premiums, perfectly aware of the tragedies in Venezuela resulting from widespread corruption and violations of human rights, including the current violent repression of those demonstrating against the government.

Sir, many have argued that the world urgently needs a Sovereign Debt Restructuring Mechanism, SDRM. I agree but for more than a decade I have held that must start by defining clearly what credits are clearly bona-fide, doubtful or plain odious.

Dizard writes: “One of the key questions to ask about distressed sovereign credits is whether the paper is owned by locals. Even during Nigeria’s troubles in the 1970s and 1980s, the central bank continued to pay its promissory notes, even as its bank loans went into default. Nigerian officials owned some of the notes.”

Clearly in a case like Venezuela the Venezuelans should have a right to know exactly who were the financiers of their malign regime, and of how they came into holding these credits.

The “need” for holding Venezuelan paper so as to conform to some Emerging Market portfolios might have entrapped some investment funds. In such cases no much shame falls on them but of course they should voluntary submit their investments to a debt to food and medicines conversion program, and the product donated to the poor.

Personally I am trying to motivate a constitutional reform in Venezuela that would assign the property of its natural resources directly to the citizens. I wonder what judges would then authorize the embargo of a tanker that carried oil to be exchanged for food and medicines for the hungry owners of the oil.

I do that not for the purpose of getting away from onerous financial commitments but for the much more important mission of not having future Venezuelan governments to have a chance to do, ever again, what this XXI Century Socialistic revolution has done to my homeland.

Whether this would make it “more difficult and expensive to sell bonds if the state wants to fund pension obligations or fix its highways” is of little or no concern to me. In fact, the more I look around in the world and read of unfunded pension obligations that might be satisfied with debt to be paid by future generations… those limitations sounds like great news.

@PerKurowski

Should financing gas chambers in Auschwitz be right if the risk premiums are right?

Sir, Steve Johnson quotes Claudia Calich, the emerging markets debt manager at M&G Investments: “with a lot of the countries [EM bond funds] invest in . . . If you start to be very strict on every country, there would be very few that are squeaky clean in terms of democracy and human rights.” “Investors bet Venezuela crisis triggers default” June 6.

What does she mean to be “very strict”? Not investing in a country because of corruption and mismanagement, in which people die for lack of food and medicines, and where human rights’ violations are committed, is that being too strict?

The world needs a sovereign debt restructuring mechanism (SDRM), and the first order of issue of such mechanism, should be to classify the credits being presented for collection into bona fide, suspicious and outright odious. 

As a citizen, I can’t wait for that date when credits given to a government, with interest rates that exceed in some substantial way those paid by other safer sovereigns, have their collection possibilities automatically restricted by a SDRM. For instance those buying bonds for 30 cents on the dollar, should not be able to present for collection more than those 30 cents.

Those knowingly financing human right violations should also be deemed accessory to those crimes. 

Sir, financiers might need credit ratings, but we citizens need ethics-ratings even more. Those ethics ratings should of course reflect the existence of accusations for violations to human rights. . 

http://unsustainabledebtsustainability.blogspot.com

@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

Odious bank regulations have hurt the working class the last decades more than Trump could do during four years

Sir, Lawrence Summers writes: “Not even US presidents with political mandates can repeal the laws of economics…Populist economics will play out differently in the US than in emerging markets. But the results will be no better”, “A badly-designed US stimulus will only hurt the working class” November 14.

But neither can almost self-appointed bank regulators repeal the laws of economic.

With their “more risk more capital – less risk less capital” technocrats send politicians and the general public the populist message that doing so, would help to stave of bank crisis without affecting growth.

For a starter that was pure nonsense since major bank crises are never the result of excessive exposures to something ex ante perceived as risky when incorporated on the balance sheet.

But much worse the populist technocrats assigned a risk weight of zero percent to the government and 100% to We the People.

Since that can only be based on the so statist and so false assumption that government bureaucrats know better what to do with bank credit than SMEs and entrepreneurs, productivity and job creation has of course been negatively affected.

The wealthy, at least in the short term, are better positioned to survive any dumb regulatory distortions than the working class. Long term, much less can the young, those who can only count on abundant risk-taking by the private sector to generate an economy that could serve their needs in the future.

Lawrence Summers is fixated on fixing the potholes of today, without concerning himself about who could use those pothole free roads efficiently tomorrow, generating profits and jobs.

Lawrence Summers also insists on that the public sector should take advantage of the very low interest rates to take on more debt, and do more infrastructure investments. That is because he resists the idea that those low interest rates might in much be the result of very costly regulatory subsidies to the sovereign, paid by us We the People, workers, SMES and entrepreneurs.

Sir, as I see, it if we insist going down the current bank regulations road, there will be an immense scarcity of basements where the unemployed young can live with their parents. 

PS. Here’s a link to what Professor Lawrence Summers answered me last week during IMF’s Annual Research Conference. 

@PerKurowski

FT, the Basel Committee has already done more harm to the global liberal order than what one or two Trump could do.

Sir, you write: “The most powerful nation on Earth has elected a real-estate mogul with no experience in government, a self-styled strongman, contemptuous of allies, civil discourse and democratic convention. Barring a protean change of personality, Mr Trump’s victory represents, at face value, a threat to the western democratic model.” “Trump’s victory challenges the global liberal order” December 10.

Let us pray we’re all wrong about our quite natural concerns; for a starter the election result was quite a surprise for most of us, probably even to Mr. Trump.

Nonetheless, as I have been arguing for years, the Basel Accord, and its ensuing bank regulations has already endangered “the global liberal order”, probably much more than what one or a couple of Trumps could do.

First, for the purpose of setting the capital requirements for banks, it determined the risk weight for the sovereign to be 0% while that of We the People was set at 100%. That de facto means that regulators believe government bureaucrats can use bank credit more efficiently than for instance SMEs and entrepreneurs. What on earth has that to do with a global liberal order? Those who still argue the 1989 fall of the Berlin Wall heralded the collapse of communism, must have no idea about 1988 Basel Accord.

And setting the capital requirements for banks based on ex ante perceived risks, risks that were already cleared for by bankers by means of the size of exposures and interest rates, introduced monstrous distortions in the allocation of bank credit to the real economy. What on earth has such distortions to do with a global liberal order? 

And the doubling down on ex ante perceived risk, meant that the more risky-bays where SMEs and entrepreneurs reside, were to be explored much less; while dangerously overpopulating “safe” havens such as sovereigns, AAA rated and housing finance.

What on earth has silly risk aversion induced by regulators to do with a global liberal order that should thrive on risk-taking ?

Also, by much favoring The Safe’s access to bank credit. it negated The Risky many of those credit opportunities that could have helped them to realize their dreams, and helped us with new jobs. What has such odious regulatory discrimination to do with a global liberal order?

Sir, on all this You and the whole Financial Times have seemingly decided to keep mum. It seems a bit suspicious. Though you proudly state “without favour” in your motto, could it be FT is in reality harboring a very pro-statist and interventionist heart?

PS. Sir, please don’t insult our intelligence by telling us this was all done in order to make our banks safer. You know very well that no major or even minor bank crisis has been caused by excessive exposures to what has been ex ante perceived as risky.

@PerKurowski

Progressives, is ECB’s Mario Draghi shamelessly insulting your intelligence, lying to your face, or just clueless?

Sir, Claire Jones writes: “Mario Draghi hit back on behalf of monetary global policymakers, dismissing growing criticism that their aggressive actions to support the economy had widened the gap between rich and poor”, Draghi said “We have every reason to believe that, with the impetus provided by our recent measures, monetary policy is working as expected: by boosting consumption and investment and creating jobs, which is always socially progressive” "Draghi denies QE hits poor hardest" October 27

Draghi is lying, that is unless he is dangerously clueless!

Besides being President of the European Central Bank, 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.

Therefore Draghi must be perfectly aware of the odious discrimination against the riskier (including the riskier future) that, by favoring so much what is ex ante perceived as safe, is imbedded in the current capital requirements for banks. The sad truth is that bank regulators, the Basel Committee and FSB, have de facto decreed inequality in the access to the opportunities represented by bank credit.

The distortion that nefarious piece of regulation produces, impedes that any stimuli, like that of already tilted in favor of assets owners QEs, can reach where it best could help to create jobs. In other words regulators make banks finance “safe” basements where the young can live with their parents, not the new “risky” jobs they need for them to also become parents.

And Sir, for Draghi to boast his policies to be “socially progressive”, must be an insult to all those who like to define themselves as progressive… that is unless that term has a totally different meaning I am unaware of.

PS: Again, here is an aide memoire on some of the monstrous mistakes of said regulations.

@PerKurowski ©

FT, where’s the real hurdle? In PDVSA’s debt swap, or in PDVSA and Venezuela’s government?

Sir, Eric Platt and Jessica Dye write: “Analysts and bankers remain optimistic that a deal will be clinched, as a default would cut both Venezuela’s and PDVSA’s credit lines with lenders and deepen the country’s recession.” “PDVSA debt swap plan hits hurdle” October 11.

Really? Could it not be so that helping to finance one of the demonstratively most inept governments ever could only deepen and prolong a recession that, right after a huge oil boom, in a country that states it holds the largest oil reserves in the world, has its citizens starving and without access to medicines?

Venezuela is in utter disorder, and its people in utter despair, and still its government sells gas at less than US$ 4 cents a gallon, thereby allowing some to smuggle it out and make juicy profits. That, no matter how you look at it, is a de facto economic crime against humanity.

So “T Rowe Price owned $274m worth of the 2017 bonds”. Does T Rowe Price really think that its clients, though they might make huge speculative profits in the short term, are truly benefitted long term by financing an entity as mismanaged as T Rowe Price knows PDVSA is? Would T Rowe Price’s investors have liked it if Venezuelans had financed a PDUSA and thereby helped keep a hypothetical authoritarian regime in power? When is what is being financed going to be an issue? Or is it really that you can finance anything at all, as longs as the risk premiums are juicy?

Sir, to be clear, I am not writing this solely in “opposition” to the current Venezuela government. For decades, long before the Chavez years, I have been opposed to odious debts, odious credits and odious borrowings… anywhere.

PS. I am supposing no one would dare to expose such naiveté as arguing that lending to PDVSA is distinct from lending to the Venezuela government.

@PerKurowski ©