Our economies, now turning very flabby, will soon fall into a permanent falsetto... unless

Sir, in Martin Wolf in explaining “The puzzle of the UK´s falling labour productivity” September 21 advances the possibility of one cause, suggested by Ben Broadbent of the Bank of England’s Monetary Policy Committee, namely that of “misallocation of capital dues to a defective financial system”. Wolf accepts it but does not believe it to be very important. 

Of course, if he cannot get a grip around the concept that allowing banks to leverage their equity more when lending to the “not-risky” than when lending to the “risky” introduces incredible distortions in the economy, and guarantees a flabby economy, he cannot think of it as important. 

The fact though is that funds are flowing to what is perceived as safe, and away from what is perceived as risky, in all Western economies, as a consequence of mindboggling stupid bank regulations. 

In this context, the small efforts to make up for the failings, like the one Wolf states he has proposed, namely that the government should insure the tail risk on bank lending to small and medium enterprises, are almost laughable. What he actually saying is that, insure the tail risk for these risky borrowers and then you might define them as “not-risky” and allow them access to bank credit in the same terms as those currently considered as “not-risky”. And that is not the way to go about correcting the mistakes made. 

Our economies, UK’s included, are castrated by the capital requirements for banks based on perceived risks, and, if nothing is done urgently about that, they might soon fall into a permanent falsetto.

PS. For the benefit of those who like Martin Wolf do not get it, I am trying to put together an introductory course, a 101, on the issue of Stupid Bank Regulations

The animal spirits, at least those of the banks, are not free to roam as they should.

Sir, Jesse Norman, a conservative MP in UK, writes that the recovery from a balance sheet recession, with a difficult process of deleveraging which reduces both demand and the effectiveness of monetary policy, requires not merely savvy economics, but a feel for animal spirits from policy makers”, “Britain has the political capital to boost investment” September 20. 

How I would like to sit down with Mr. Norman and explain to him how the capital requirements for banks, based on perceived risk, not only caused the explosion that brought us the balance sheet recession but, because this foolish regulatory discrimination, against what is perceived as risky, like the small businesses and the entrepreneurs is still well and alive, it also fundamentally hinders any recovery. 

Hopefully he finds time to read about it in my blog that contains my hundreds of letters, over many years, that I have written to FT on this issue, but that FT has preferred to ignore.

In the “Home of the Brave” the banks should not be induced to play it foolishly safe

Sir, James Bullard writes that after the large shock suffered by the US 2008 and 2009 “Patience is required to meet the Fed’s dual mandate”, of containing inflation and promoting employment September 20. 

It appears that Mr. Bullard believes that shock to be exogenous. I on the contrary am sure that the mega-shock was the natural result of capital requirements for banks based on perceived risks, which dramatically distorted the economy, in the US and in Europe. 

And those capital requirements are still distorting and do still discriminate against the “risky”, like the small businesses and the entrepreneurs… and, let's be honest, who can expect generating a new generation of jobs that way? 

No, if the Fed was truly serious about fighting unemployment, then it would requests that the capital requirements for banks had more to do with that objective, like basing it on potential-of-job-creation ratings, instead of on purposeless credit risk ratings, most especially since the perceived credit risks are already cleared for by the banks with other means. 

No, if the “Home of the Brave” wants to get out of a downward spiral, it cannot allow bank regulators to continue to induce the banks to play it foolishly safe. To do so, that would indeed be to inflict permanent damage on the US economy (and exactly the same, or even more, goes for Europe).

Before going after the titans of Wall Street, we need to go after the petit bureaucrats of bank regulations

Sir, John Kay ends an article that includes many truths about bank regulations with “the only sustainable answer to the issue of systemically important financial institutions is to limit the domain of systemic importance. Until politicians are prepared to face down Wall Street titans on that issue, regulatory reform will not be serious.” “Take on Wall Street titans if you want reforms” September 19. 

Yes, but, the systemically important financial institutions grew to be systemically important institutions, much with the help of bank regulators who, I do not really know with what authority, decided that banks could hold many assets against little or no capital, as long as these assets were perceived as “not-risky”. 

Had for instance Basel II decided that banks would need 8 percent of capital for any asset it held, we might still have systemically important financial institutions, but their systemic importance would be just a fraction of their current. 

And since there has been about five years since the crisis began, and current bank regulators have still not admitted the simple truth that their capital requirements based on perceived risk distort the markets, before we hit the titans of Wall Street down, we have to hit the petit bureaucrats of bank regulations who believe themselves titans in risk management down. 

John Kay also wrote that any capital target “will be gamed by those who observed the letter rather than its spirit”. Yes that is true, that is a fact of life, but, let us at least not have petit regulators also trying to simultaneously game the markets with their silly risk-adverse risk-weights. 

Frankly, who authorized bank regulators to do to our banks what they did?

Might Martin Wolf have too many “not risky” friends and too few “risky”?

Sir I completely share Martin Wolf’s concerns about “1930s…economic catastrophe with long lasting political results” “Bernanke makes an historic choice” September 19. And to that effect let me just reference the letter I wrote titled “The monsters that thrive on hardship haunt my dreams”, and that you so kindly published on the last day of 2009. 

But it is precisely because of it that I do not agree with any injections of any sort of stimulus, before we have eliminated the regulatory taxes on access to bank credit for those perceived as “risky”, and which result from the regulatory subsidies given to the access to bank credit to those perceived as “not risky”. That discrimination waters down any long lasting effect of QEs and fiscal stimulus, and is therefore basically setting us up for a monstrous inflation. 

I just cannot understand how Martin Wolf can keep silent, year after year, about the distortions produced by petit bank regulators, when setting their risk-adverse risk-weights which determine the capital requirements for banks. Or, is it that Wolf has too many friends among the “not-risky” and too few among the “risky”? If so, perhaps he should divulge his conflict of interest. 

Frankly, who authorized bank regulators to do to our banks what they did?

We must stop petit bank regulatory bureaucrats from distorting the markets with their risk-weights

Sir, George Magnus opines that “Draghi’s bond-buying plan is economically unsound” September 18. I fully agree with him but for a reason he does not mention, or is perhaps not even aware of. 

Most of those funds that ECB’s “outright monetary transaction” generate more sooner than later, will flow through a banking system that has become regressive, as a consequence of bank capital requirements based on risk. 

If regulators are not willing to allow the funds to flow where these could be most productive, but insist on these flowing to where they ex-ante believe these to be safer, they completely ignore the role of the market… and that is as economically unsound as it comes. 

We must urgently allow the market decide without some petit bank regulatory bureaucrats distorting its functioning by assigning, quite haphazardly, the risk-weights which decide how much capital each bank needs, and, with that, who in this bank capital scarce world, gets the loans.

Professor Summers still lives in blissful ignorance about our most urgent “magneto” problem.

Sir, Professor Lawrence Summers writes that “short run increases in demand and output would have medium to long term benefits as the economy reaps the rewards of what economists call hysteresis effect”, and that this calls for more public investment, “Britain risks a lost decade unless it changes course”, September 17. 

I can only understand that as a result of him still being in blissful ignorance of current bank regulations, which artificially favor access to bank credit, solely on the basis of being perceived as not-risky, and thereby makes the access to bank lending to those perceived as risky, like small businesses and entrepreneurs, scarcer and more expensive than normal. 

When will Professor Summers get to know that those regulations represent in fact the most urgent “magneto” problem that needs to be fixed, in the UK, in the rest of Europe and in America for our economies to run? Before that, any public investments based on deficit public budgets, and any lose monetary policy for that matter, can only threaten to further flood the engines and consume what’s left of scarce fiscal and monetary policy space.

No more QEs and fiscal stimulus. Bet on a bank stimulus for the “risky”, in America and in Europe

Sir, Wolfgang Münchau writes on “Why QE would be the right policy for Europe, too” September 17. Since I do not feel Bernanke’s QE is correct either, I cannot agree with this. 

It is high time to forget about any QEs and or fiscal stimulus, decided on an implemented by bureaucrats at a long distance from the real markets, and which have only consumed scarce monetary and fiscal space, with very little sustainable to show for it. 

Instead we need the banks to direct those stimulus flows to where these are most needed and could be the most productive. And this, governments can do, without asking anyone’s permission, or worry about any unconstitutionality. All it takes is that they instruct the bank regulators to drastically reduce the capital requirements for banks when lending to what is perceived as risky small businesses and entrepreneurs. 

Would this be reckless? Not at all, or at least much less than when allowing the banks to hold very little when lending to what is perceived as not-risky, precisely the type of exposures that have always been behind any major bank crisis.

If a new QE is politically mistimed I do not know, but it sure is still economically mistimed

Sir, I refer to your “Bernanke’s latest round of easing”, September 16, where you comment on Romney arguing on Bernanke bailing politically out Obama. 

I do not know if this latest QE is mistimed because of political reason, I do not really care about that, but what I do know, is that not only the latest but the all the former QEs, and fiscal stimulus too, have been mistimed because of economic reasons. 

Having had frequent experiences in workouts, I know you do not inject any fresh funds into any failed project, until you at least believe you have made the changes required for its success. And, as far as I know, central banks and governments, confronting the crisis begun in 2007, have been wasting away immense monetary and fiscal spaces, like if there was no tomorrow, without imposing any sort of changes in then economy. 

As an absolute minimum, central banks and governments should have eliminated those ridicule regulations that make it so hard and expensive for those perceived as “risky” to access bank credit, like the small businesses and entrepreneurs… precisely those who generates the jobs that Bernanke now says he cares so much about.

A wicked question for the candidates for governor of Bank of England

Sir, as you write, finding a governor of all the talents required to run the Bank of England, is indeed an extraordinarily important and formidable task, September 14. 

But that is under normal circumstances. Currently though, given the difficulties with the banks, even more important and urgent than that, is to find a better regulatory paradigm. And for this purpose, I would begin by asking each candidate for governor, the following simple question: 

When do banks most need capital, when the risky turn out risky, or when the “not-risky” turn out risky?

And then follow it up with a “So?”

We need more widows and orphans as shareholders of our banks

Sir, the capital of my homeland (Caracas, Venezuela), used to, for over a hundred years, have its electricity needs well serviced by a private company run by electrical engineers, and its shareholders were mostly widows and orphans. But then came the financial engineers and took it over, and leveraged it to the tilt, and the consumers were not longer its prime focus of interest, the speculative shareholders were. How we wish we could have the old company back. In this particular case that seems impossible because it has since then been taken over by the Petrostate. 

I mention this because John Gapper, though mentioning “the targets for returns on equity” leaves aside the issue that different shareholders might have different targets, “The financial incentives to behave badly will endure” September 13. For instance, if capital requirements for banks were substantially increased, that would of course diminish the returns on bank equity, but that could also help to make banks safer investments, and with that attract the widows and orphans who could be happy with lower but safer returns. 

As a client of any utility, whether electricity or banking, I would like its shareholders to be widows and orphans, and so should the regulators.

Let us welcome John Kay’s awakening. Better late than never! Let us now hope he wakes up completely

Sir, John Kay, refers to “Goodhart’s law”, from the 1970s, which states that “any measure adopted as a target loses the information content that appeared to make it relevant. People [bankers] change their behavior to meet the target”, “The law that explains the folly of bank regulation”, September 12. 

Well, if that law was known, one could have presumed someone would have alerted the bank regulators about that, when they in the Basel Committee were concocting their capital requirements for banks targeted based on perceived risks. Where was Charles Goodhart, and those who knew of his law, when we needed him? 

The fact though is that in this case it was even worse, forget about “changed behavior” because when regulators set their capital requirements, they even ignored the initial behavior of bankers when reacting to the perceived risk, and which of course ignored the fact that bankers already had a propensity to go for the “absolutely not risky”. And, in doing so, they doomed our banks to a crisis larger than ordinary bank crisis. 

But now at least John Kay writes about the Basel Committee’s “irrelevant” “conclaves”, held “to give politicians and the public a sense that something is being done while enabling banks and regulators to go on doing what they have always done”. But, honestly, that Kay can do so without the slightest word of “sorry”, after he in the midst of this monstrous crisis has himself, for years, blithely ignored Goodhart’s Law, is sort of sad. 

That said, let us welcome John Kay’s awakening, better late than never, and let us hope he now wakes up completely. 

PS. In http://teawithft.blogspot.com/search/label/John%20Kay you will find the letters I have written in response to John Kay’s articles.

If prudent finance requires partnerships, why then are not regulators also made liable for bank losses?

Sir, when Basel II states that banks need zero capital when lending to an infallible sovereign and 1.6 percent when lending to slightly more suspect sovereign or private AAA ratings, what does that say with respect to shareholders of the bank? The answer is that for all practical purposes the regulators feel that for that business the shareholders are not really needed. 

And that is why when I read Martin Jacomb’s “Prudent finance requires a return to partnership” December 12, my first reaction was… do we then need credit ratings for the partners?, and my second, should the not bank regulators also be partners of the banks they regulate? They assign risk-weights too, don't they? 

Frankly, before thinking about how to create partnerships able to shoulder the too big to fail, we should be thinking to make shareholders at least 8 percent important, for any type of bank business.

Europe needs an urgent explicatory mea culpa from Mario Draghi and colleagues.

Sir, Martin Wolf, in “Draghi alone cannot save the euro” September 12, writes the following: 

“But the risks of a breakup [of the eurozone] cannot be eliminated. If these are to disappear, citizens of debtor countries must see a credible path to growth, while citizens of creditor countries must believe they are not throwing money down a bottomless pit… Is there any way the ECB on its own could make it more credible that the eurozone will last?” 

Yes there is. Mario Draghi could do a mea culpa, and explain to Europe how he, and his regulator colleagues, messed it all up by distorting the markets with their capital requirements for banks based on perceived risk, which helped create and finance much of the existent “bad equilibrium”. 

That regulation made the banks run for the “absolutely-no-risk” areas, because there was where they could leverage their equity the most, and this not only caused some fairly safe havens to become dangerously overpopulated, like Greece and real estate in Spain, but also stopped small businesses and entrepreneurs from accessing bank credit at competitive rates. 

And then so as to explain how much they understand how wrong they did, he should ask his regulating colleagues, to start looking in at capital requirements for banks with a purpose, like based on job creation potential ratings. 

Then Europe would know why it all went so wrong and therefore be able to believe in why it can be saved… but, again, that of course requires a fair dose of humility from Mario Draghi and colleagues. 

The Fed is actually stopping the money from flowing where it, and we, most need it to flow.

Sir, Ruchir Sharma writes “The Fed can print all the money it wants – but it cannot dictate where it will go” “For a true stimulus, the Fed should drop QE3” September 11. 

Actually it is much worse than that, since the Fed, by means of capital requirements based on perceived risks imposed by their colleagues, the bank regulators, is dictating where money, or at least bank credit, should not flow, which is precisely where we and they would most want and need it to flow… to small businesses and entrepreneurs. 

Get rid of the distortions produced by bank regulators with a lot of hubris playing risk managers of the world and then perhaps a QE3, or better yet a helicopter drop, might actually have a chance to work.

Mr. Draghi is just naturally scared, shooting into the dark night.

Sir, “Why has Mr. Draghi done it?” asks Gideon Rachman with respect to ECB’s announcement of “unlimited” purchases of bonds, “Democracy is the loser in the struggle to save the euro” September 11. 

The real answer is of course Mr. Draghi is scared, as we all should be of course, but, because he does not really understands what is happening, he has no other option than to massively and blindly shoot into in the dark night. 

Again, I repeat anyone who does not understand the extent of distortion and damages produced by the capital requirements based on perceived risk does not know how we got here or how we get out of it. 

 And yes, if democracy is going down the tube, so is transparency. Article 32 of the Regulations of the European Financial Stabilisation Mechanism, ESM, states: “The archives of the ESM and all documents belonging to the ESM or held by it, shall be inviolable.” 

Does Europe really have to step back into the dark ages in order to go forward in the 21st Century?

Interest rates are low, but the ratio of rates to the “risky” over the rates to the “infallible” is probably the highest ever.

Sir, John Authers quotes Deutsche Bank’s market historian Jim Read on us “entering the unknown” with respect to the interest rates being “so low, for so long, for so many”, and he writes in UK “the base rates are at the lowest in 318 years, “London property market cannot avoid mean reversion” September 10. 

Absolutely, but those are the rates for those in the center rated absolutely safe, those so much favored by accommodating capital requirements for banks. If he wants to see a quite different story, he should look at the ratio between the interest rate charged to the “risky”, those living in the periphery, like small businesses and entrepreneurs, divided by the interest rate charged to the officially “infallible”, and he might then find that ratio larger than ever. 

If the current mean, which has resulted from these capital requirements is to revert to some historic standard then regulations should also conform to a historic standard. 

Authers also writes “Bank of England’s balance sheet is its biggest, compared with the size of the UK economy, since the records began in 1830”. But, to get a real grip on the true monstrous size of that balance sheet, he should perhaps also include how much QE all those commercial banks, acting almost as quasi-branches of the central bank, have provided to government’s treasury, because that requires little or no capital of them.

Give back to markets the role of risk management for the world which the bank regulators usurped

Sir, Robin Harding and Chris Giles when reporting on the current travails of central bankers they quote Donald Kohn of Brookings Institute saying “something deeper going on” referring to “something structural [that] has changed to hold back growth”, "Not so different this time", September 10. 

I guess you know what I am about to say. Yes! That “something deeper going on”, is the incredible discrimination in favor of what is perceived as “not-risky” and against what is perceived as “risky”, and which is present in the current capital requirements for banks based on perceived risk. 

Of course these central banker’s don’t know what to do, their instruments are all wrong, they have no idea of what the real market rates would be for the debt of their "infallible" sovereigns, if banks needed to hold as much capital than when lending to the more fallible citizens. 

Never before have bank regulators taken upon themselves the role of playing risk managers of the world. We need that role to be given back urgently, to the markets.

An essential part of the narrative on the eurozone crisis is withheld, among others, by FT

Sir, Wolfgang Münchau, in “Why Weidmann is winning the debate on policy”, September 10, writes the following: “The German public has bought into the narrative that the crisis was caused by profligate southern European and consumers who had wasted the first decade of their membership of the eurozone indulging in a debt financed housing and consumption boom. It is a false morality tale, mostly devoid of economic reasoning. But this has not stopped it from becoming the dominant narrative. Not enough politicians, certainly not enough journalists and commentators are pushing against this narrative” 

And I ask again why is it that FT resists to present my argument of that this crisis was doomed by the regulators, some of them Germans, to happen? The fact is that for instance a German bank, was allowed to lend to a Greece holding only 1.6 percent in capital, making it possible for it to leverage its equity 62.5 to 1 with Greece´s risk-adjusted returns, while, when lending to a German small business or entrepreneur, it was required to hold 8 percent in capital, meaning it could only leverage its equity with those risk-adjusted returns, 12.5 to 1. If you do not think that this fact is an essential part of the real narrative of what has gone wrong, I just do not understand you. 

(Would it really hurt the FT´s ego so much acknowledging that little me, who has written hundreds of letters to you about it, was correct, and so that you prefer to shut up about it? Poor Europe... with friends like that)

Defining the purpose of banks, would be good regulatory behavior

Sir, Bradley Fried writes that when the Commission of Banking Standards resumes it work, it needs to look at the human behavior of the bankers, “Banks have to learn to compete on good behavior”, September 10. And he is more right than he imagines. 

Had for instance regulators been as perceptive about the behavior of bankers as Mark Twain, with his their wanting to lend you the umbrella when the sun shines and take it away when it rains, they would never have come up with such daft regulations as their capital requirements for banks based on perceived risk. Or, if they had still used perceived risks, then perhaps they would have set these totally opposite to the current ones, the lower the perceived risk the higher the capital requirement. 

But let us hope bank regulators also learn to compete on good behavior, and come understand that, when you regulate something, it is good behavior first to define its purpose. 

FT, do the “not-risky” need additional help accessing bank credit and the “risky” need to be hindered more?

Sir, do you really think that giving those perceived as “not risky”, like those rated AAA, regulatory assistance in their access to bank credit, and which of course translates into hindering the same more for those perceived as risky, like a small business, is an acceptable and worthy distortion of the market? 

Apparently you do, that is unless you have not yet been able to understand, what capital requirements for banks based on perceived risk does.

Are you, FT, Ok with this?

Sir, are you Ok with Article 32 of the Regulations of the European Financial Stabilisation Mechanism, ESM, which states the following: 

“The archives of the ESM and all documents belonging to the ESM or held by it, shall be inviolable.” 

Is that not taking Europe back, fast, to the dark ages?

And why did FT mostly ignore also this for about a decade?

Sir, what Mr. Robin Monro-Davies tells you in his letter “Making Basel III look like a doodle” September 8, is what I have been telling you for about a decade and which you basically, for reasons I cannot understand, decided to ignore. 

I greeted regulators during a workshop at the World Bank on Basel II in May 2003 with a “I congratulate you, we can already begin to see how Basel II is forcing bank regulators to make a real professional quantum leap. As I see it, you will have a lot of homework in the next years, brushing up on your calculus—almost a career change.” 

And I have also often warned about “Solvency II” taking the “Basel II” route.

And why did FT mostly ignored this for about a decade?

Sir, what Mr. Keith Phair tells you in his letter “Caveat Emptor should be everybody´s maxim”, September 8, refers precisely to something I have been telling you for about a decade, and which you basically, for reasons I cannot understand, decided to ignore.

A prominent and important FT journalist interviewed invisibly on my empty chair?

Sir, I recently sat down a prominent and important bank regulator invisible on an empty chair and made him some questions. And I am sort toying with the idea of now inviting a prominent and important FT journalist, to do the same. I tell you why. 

Over the last decade I have been writing literally hundreds of letters (over 700) to the Financial Times referring to the fact that the current capital requirements for banks, based on perceived risks, constitute a formidable and dangerous source of distortion of the markets, to such an extent that it can even be blamed for the current crisis. 

Why distortion? Setting the risk-weights which determine the capital requirements for the banks, in a quite arbitrary way, means that the regulator is, in a very non-transparent way, intruding in how the market evaluates risks. That they for that purpose use the same risk perceptions which are cleared for by not blinds bankers makes it so much worse, as that only guarantees that the banks will overdose on the perceptions of risk. 

Why dangerous? Because by giving the banks additional incentives to search out the “not-risky”, that will cause a dangerous overpopulation of the safe-havens. And also because by giving the banks additional incentives to stay away from what is officially perceived as “risky”, the banks will not perform adequately their role of allocating capital in the markets. 

But you the Editor, and the journalists in FT, have for all practical purposes been totally silent about this. I have been told by one of you that I am just too monothematic, which if you look at all my letters is really not true, but, even if so, that would be something much less serious than your monothematic silence. 

When I hear one of you described as an “uncompromisingly pro-market columnist”, but he is still incapable of understanding and much less defending the market against this really unauthorized regulatory intrusion, I do not know whether to cry, or whether to believe that he is just too dumb to get it, or whether he has his own agenda.

Yes, occasionally, someone in FT refers to some of my arguments, but then, always in a very partial way. 

Imagine what could have happened to bank regulations, Basel III and other, if FT had helped to give me voice, earlier, in time. Can you imagine how much buildup of dangerous exposures to what was perceived as absolutely safe could have been avoided? Can you imagine how much better use we could have given to that scarce fiscal and monetary policy space that is being consumed so fast? 

Why was I and my arguments censored this much by a paper that so bravely announces in its motto "Without fear and without favor"? 

Dumb bank regulatory nannies… talk about a real hazard!

Sir, James Mackintosh in “ECB bazooka faces peripheral tests” writes about ECB’s recent “grand plan to save the euro” and of the moral hazard “that Spain or another beneficiary fritters away the savings from cheaper financing in order to please voters”. 

The hazard of that moral hazard is relatively small when compared to the hazard of having banks regulated by nannies who do not understand what they are doing. 

When a regulator allows a bank to have less capital, only because a borrower is perceived as “not-risky”, he is effectively, de facto, discriminating against those perceived as “risky”, like the small business and entrepreneurs. And, discriminating against the access to bank credit of these so needed “risky” risk-takers is, more or less, a death sentence to our economies.

FT, your protégé Draghi, before any audacious gamble, should dismantle overly-cautious-nanny bank regulations

Sir, in your “Mario Draghi’s audacious gamble” September 7, you write: “The eurozone’s financial market is fragmenting. The wide divergence of rates between different countries is raising fears that the monetary policy mechanism may be broken.” 

That is correct, but again you do not mention how current bank regulation, with its capital requirements based on perceived risk, fragmented the markets, and is now responsible for the widening of interest gap between those countries officially perceived as absolutely safe and those as “risky”. 

For those regulations, your protégé Mario Draghi is very much responsible, and so before any “audacious gamble”, he would do much better dismantling those really dumb overly-cautious-nanny regulations.

The euro-battle will only weaken the whole eurozone (and the rest of the world too)

Sir, John Plender points correctly to the nasty realities of a credit-debtor relationship, in “Only the weakest will triumph in the euro battle” September 7. That is of course a slight exaggeration of his, since he knows there is no real triumph for the weaker either. 

The eurozone got messed up because their bank regulators gave banks excessive incentives to lend to what was perceived as “not-risky”, like Greece or Spain’s real estate sector, and the eurozone cannot now get out of the crisis because their bank regulators now give the banks excessive disincentives to not lend to what is perceived as risky, like Greece or Spain. 

And if the major creditors, those for the time being the last standing “not-risky”, the stronger, think they can get away with regulatory discrimination against the risky, the weaker, at no cost for them, then they’re just dumb. 

It might well be that “The reality is that the ECB’s new initiative may prove to be just another transfer to distress debtors” but the fact is that this is not only about redistribution within Europe as it can also be, if badly handled, about the general impoverishment of the whole Europe (and the rest of the world too).

And what if an expelled Greece insists in using the euro?

Sir, Ralph Atkins discusses that the “Fear of a Greek exit could strengthen Draghi’shand” September 6. 

Again the possibility that Greece defaults, the others get mad and expel Greece from the eurozone, but Greece keeps on using the euro, is not discussed. Why? To me that sounds as the most reasonable proposition, so that Greece does also not lose what it has left marketing a hard to sell neo-drachmas. 

And why is so little discussed about making the best out of all those funds held by Greeks outside Greece? Is it that it would have been preferably that those funds had been lost too?

We need solutions not solely based on finance ministers and central-bankers

Sir, Michael Steen reports “All eyes and ears on Draghi over bond proposal” September 5.

Sincerely why should the solution to the current crisis come down exclusively from ministers of finance and central bankers? Especially when it was the bank regulators they appointed who messed it all up? 

Sincerely any solution, without major economic structural changes occurring, among other in bank regulations, will only be kicking the can further up the slippery slope.

We need to think urgently about how for instance manage to channel the private Greek savings, which luckily have not also been lost, into solutions more helpful than the buying of location-location-locations in London. 

On a recent Labor-With-No-Jobs-Day, I speculated about an idea that could be good for Europe, and for America to explore and here below is the link:

http://teawithft.blogspot.com/2012/09/theres-economic-war-raging-out-there.html

There’s an economic war raging out there, so we need ministers and bank regulators with vision, not janitors and nannies!

Sir, Josef Joffe’s “Merkel’s case of good politics and bad economics” September 5, makes a solid case for buying gold and go to church and pray (and perhaps buy a gun) 

What can I say? There’s an economic war raging out there and we need our finance ministers and bank regulators to be men of vision, not janitors or nannies! Has anyone seen a Lord Keynes lately? 

Personally, and not as a Lord Keynes by any means, but as a simple consultant with quite a lot of workout experience, on a recent Labor-With-No-Jobs-Day, I thought that the following could be a good idea for Europe and America to explore: 

There is currently a tremendous scarcity of bank capital, and all fresh capital raised is going to plug holes instead of generating the new business needed… and so we are in dire need of traditional bank capital, not that silly modern stuff. 

In this respect I would gladly contemplate granting a 15 years full exoneration from corporate and dividend taxes, to whatever bank capital is raised by a banks that agrees to hold 15 percent in capital against any asset, no matter how safe or risky it might seem. 

There is a world of productive risk-taking waiting out there to get our youngster their generation of good jobs… let’s give them a chance. 

I would love to see 500 billion Euros (dollars) in this type of fresh bank capital...which could be leveraged into over 3 trillion Euros (dollars) in loans which do not discriminate based on perceived risks more than what they should ordinary do in a free market. 

That could mean a fresh start for our economies and a full-stop to that other war our current bank-nannies are waging against the "risky".

Bank regulators should keep it simple, and not allow complexity to distract them from their real business.

Sir, as you know by now, I agree completely with the need for simplifying bank regulations, like recently suggested by Andrew Haldane, and now also strongly supported by Sebastian Mallaby, “Regulators should keep it simple”, September 5. 

But, my reasons for doing so, are not really because the issues are too complex, and the data is too hard to gather, but because the regulators have no role playing risk-managers to the world, and thereby risk adding distortions to the markets; their role is to prepare for when complex risk-management fails. 

Look at what happened! Bankers react of course to the perceived risks, by means of interest rates, amounts of exposure and terms of loans, and so, when too creative busybody regulators came along and used the same perceived risks to set their capital requirements; the whole banking sector overdosed on perceived risks… and so now we have a crisis because of obese dangerous bank exposures to what was perceived as absolutely safe, and anorexic bank exposures to what was officially perceived as “risky”, like small businesses and entrepreneurs. 

There is an economic war raging, so we need ministers and bank regulators with vision, not janitors and nannies!

Mr. Draghi, nothing good comes from distorting the markets

Sir, Wolfgang Münchau, in “Here is my one piece of advice for Mr. Draghi” September 3, writes “the banking sector intermediates the imbalances that have arisen in the real economy”. 

Is Mr. Münchau really sure about that? The way I see it the regulators, with their capital requirements for banks based on perceived risk, and their risk weights, both create and intermediate more than the banks the imbalances in the real economy. 

Can you for instance think of what would happen if a German bank needed to hold the same amount of capital when lending to a small business in Greece than when lending to the German government. 

My advice for Mr. Draghi, without any doubts, would be to stop his colleagues the bank regulators from distorting the markets, since nothing good can come of that.

The bankers are what bankers always have been… not so bank regulators.

Sir, in “Changing Banking” September 3, you hold that “banks need to behave more responsible”. Of course, who would argue with that? But the subject you avoid touching with a ten foot pole, is that bank regulators too, must behave much more responsibly. 

Just as examples they are irresponsibly regulating the banks without having defined a purpose for the banks and they have irresponsibly appointed themselves as risk managers for the world, doling out risk weights here and there, which determine the capital requirements for the banks and which so dangerously distort the markets. 

No! The bankers are what bankers always have been… not so the bank regulators. 

PS. Yesterday I managed to sit down a prominent and important bank regulator in my chair, though he remained invisible and quite silent 

http://subprimeregulations.blogspot.com/2012/09/a-conversation-with-prominent-and.html

Yes, Basel III has to be thrown out the window, in its entirety, current bank regulators too

Sir, Brooke Masters, September 1, reports that Andrew Haldane, at Jackson Hole, made a “Call for simpler bank oversight” which “would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years”. 

As you must know by now, even though you quite diligently have set your mind on ignoring it, I have for almost a decade held that bank regulators are not just some few degrees wrong, but 180 degrees wrong, and so I cannot but agree with Haldane. 

His argument is in line with that of mine that holds that, by accepting to engage banks through complex regulations, the regulators have acted less as regulators and more as risk-managers… which does not make any sense, since a regulator’s prime responsibility is to prepare itself for when risk-management fails. 

But there are of course many more reasons to throw Basel III, and the current Basel Committee regulators too, out of the window. Unfortunately, no matter how wrong one can prove them to be, getting rid of it and them is no easy task, especially when even a Financial Times want to treat them with kid gloves.

How to protect EU’s economy against failed bank regulators

Sir, Wolfgang Schäuble’s “How to protect EU taxpayers against bank failures”, August 31, much provokes a “How to protect EU’s economy against failed bank regulators” 

If we are going to have “a truly effective banking supervisor to enforce a robust single rule book on the [banking] sector” then there are some minimum things that need to happen. 

First and foremost, the supervisor needs to be held accountable for what he does, and must always be willing to explain what he considers to be the purpose of the banks, and publicly answer any questions about how his regulations are intend to support the banks achieving it. 

I say this because if the earnings of EU taxpayers are decreased more by bank regulations, than the costs of paying for bank failures, the offered protection would seem somewhat lacking, to say the least. 

And though Schäuble admits that a “supervisor can only be as good as the rules it enforces, he, as most of his colleagues, still shies away from discussing their “light-touch” rules. 

Capital requirements for banks based on perceived risk, and which among others allowed banks to leverage their equity 62.5 to 1 when lending to Greece, but only 12 to 1 when lending to an unrated small business and entrepreneur… is that supposed to be “light-touch”? No, of course not, and it was really the regulators, playing risk-managers for the world, who, as I see it, caused the current crisis. 

Schäuble also writes “Four years and much regulatory work later, financial markets have become a safer place”… What? Is he running for any election? As far as I can see they have not even begun the needed reforms, to make the banks and the economy safer and more functional, as that requires first, of course, to understand and to acknowledge the mistakes they did. 

Amazingly it seems the regulators still believe it was all mostly the fault of lousy credit rating agencies and banker’s bonuses. And so sadly, their ingrained faulty risk-aversion, is still guaranteeing the dangerous overpopulation of any safe-haven, and that our banks will still keep away from lending to the “risky”, like to our small businesses and entrepreneurs.

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

The “who gets tagged last by an ad” game

Sir, Matthew Garrahan gives a lovely description on how 5-Hour energy advertising has captured the imagination of his five year old son… but also how the possibilities of advertising seem to diminish with current technological advances, “A five-year old Don Draper speaks”, August 30. 

Mr. Garrahan might hope for that, but, in just few years, he will be able to play "who gets tag last by an ad" with his son. That game consists in each one of the players sending out simultaneously an email commenting to a friend about an esoteric product of his choice… and, as the name indicates, the one whose inbox is last to get tagged by an ad offering the mentioned product, wins. 

For your info, among true professionals, this game is played with all anti-spam-filters off.

The Fed (and ECB) should not fire more bullets until the gun pipes are cleaned

Jim Paulsen writes that “the Fed is out of bullets”, evidenced by “$1.5tn in excess US bank reserves” which hardly points to “a lack of liquidity”, “It´s time for the Fed to pass its easing baton to the ECB” August 30. 

Sir, I almost feel stupid repeating for the umpteenth time this to you, but the fact is that one of the reasons for the excess US bank reserves is that the banks do not have the capital that is required of them when lending to those officially and stupidly perceived as risky, namely small businesses and entrepreneurs. 

Of course the Fed should forget about firing off more bullets, at least before they have assured themselves that the gun tubes have been cleaned… and, by the way, ECB needs to do the same cleaning.

Tax heavens are always the best antidote to tax havens… and governments should earn our taxes

Sir, I commend you for in “Taxing wealth”, August 30, daring to recognize “there is a case for shifting burden from activity to asset”. And I would agree! 

I assume though that you suppose those taxes on wealth would act as a more transparent tax substituting for how financial repression, with its negative real returns on government debt, seems currently intend to tax wealth. True? Because, if you are thinking in terms of an additional tax, then I guess, many would start searching urgently for a tax-haven.

And, of course, governments should earn our taxes!

Ending bank regulatory stupidity in the US (and Europe), is a vital non-partisan issue

Sir, I refer to Conrad Black´s, “The Republicans can end 15 years of US stupidity” August 30. I would sure like to ask Mr. Black the following question: 

Suppose there was the potential of issuing trillions of dollars in “worthless real estate-backed paper certified as investment grade by the palsied lions of Wall Street”. 

What would the possibility be of that issue finding buyers if banks needed to hold 8 percent in capital against these, meaning being able to leverage their equity 12.5 to 1, instead of the 1.6 percent that was authorized by the bank regulators in Basel II, and which allowed banks to leverage 62.5 to 1? 

My answer to it would of course be: “That issue would have been almost totally unsubscribed!” That it was a tragic success, was only the result of sheer regulatory stupidity. 

If there is one thing that WMR and Mr. Ryan, or President Obama for that matter, or republicans and democrats alike, need urgently understand, is that capital requirements for banks based on perceived risk, does not only produce dangerous distortions in the markets, but is also something completely incompatible with a “Home of the Brave” (and with a Western world built with risk-taking).

Regulators´ occurrences often represent the most dangerous quicksand

I fully agree with John Gapper when he finds not “unreasonable” the proposal by Mary Chapiro, the SEC Chairman, that money market funds would have to, “either become more like investments funds by allowing their net asset value to float, or more like banks by raising a buffer capital”, “Don´t leave the financial system on quicksand” August 30. 

That said, with respect of that “buffer capital” I hope he, and Ms Chapiro, mean one same capital requirement for any type of assets. This because since most investors are currently convinced their buck is already broken, or will be broken, their main interest is it becoming broken as little as possible. 

And, as we should know by now, nothing guarantees a super-large breakage of the buck more, than when besserwisser regulators, full of hubris, believe themselves to be the risk managers of the world, and start interfering by mean of risk-weights, with the markets´ own risk assessments. 

And, so, when regulating the money market funds (and the banks) please never forget that regulatory occurrences can also often represent the most dangerous quicksand.

Don´t prime pumps, when unclogging the tubes is needed

Sir, John Plender, referring to the annual gathering of central bankers at Jackson Hole, writes “Policy makers agonize over how best to prime the pump”, August 29, 2012. How sad they will waste their time agonizing over the wrong problem. When the tubes are clogged, you need to unclog these before priming the pump. 

Current bank regulations, specifically the capital requirements for banks based on perceived risk, are hindering the flow of credit from reaching those we most need for it to reach, namely the job creating small businesses and entrepreneurs. 

Frankly... what are the thickheaded bank regulators smoking?

If only the Fed had heeded its dual mandate

Sir, Bob Corker, in “Bernanke should show some humility at the Fed” August 29, writes “A big part of the problem is that the US Congress has given the Fed an overly broad “dual mandate” of price stability and full employment… this approach…undermines the free market system” 

Although I agree that the free market has been undermined, in this case it happens to be precisely because the Fed ignored its mandate on full employment. Had it not done so, it could never ever have approved bank regulations that so overly discriminate against job creators, like small businesses and entrepreneurs, only on account of these being perceived as “risky”… and all that, in “the Home of the bBave” 

Frankly... what are the thickheaded bank regulators smoking?

How come bank regulators seem exempt from answering questions made by the public? (And FT from reporting these)

Sir, Brooke Masters rightfully gives utmost importance to both speed and contestability in “UK regulators must judge the right time to go public” August 28. 

After so many years raising some fundamental objections to current bank regulations, without obtaining any type of answer, I hope she does also support speed and accountability when the public challenge the regulators. 

And here is a link to one of those still uncontested challenges: 

http://subprimeregulations.blogspot.com/2012/08/regulators-consider-yourselves.html

Simpler and equitable across the board bank rules, are safer because these distort less… it is as easy as that!

Sir, Nicholas Brady is absolutely right in that “We need much simpler rules to rein in the banks”, August 27. In fact he is much more right about this than what he realizes. Most, perhaps all current discussions on bank regulations relate to their effectiveness or not, from the perspective of making our banks safer. Very few, almost none, absolutely not FT, analyses these regulations from the perspective of how these so fatally distort the real economy, primarily by making the banks oversensitive to how risks are officially perceived. 

For instance, small unrated businesses and entrepreneur are normally considered much riskier than an AAA rated client, and so they have naturally to pay higher interests and get smaller loans. But on top of that, small businesses and entrepreneurs are additionally slapped by the consequences of the regulatory discrimination which occurs when bank regulators force bank to hold more capital when lending to them than when lending to an AAA rated, and therefore end up having to pay even higher interest and getting even smaller loans. 

Simpler and equitable across the board rules, are safer because these distort less… it is as easy as that! 

FT, please don't be so thick-headed and take notice!

The center should transfer to the periphery their almost ill-gotten regulatory interest rate savings

Sir, Wolfgang Münchau in “The ECB must still do its bit to help solve the crisis” August 27, reminds us of that “There is a law against monetary financing of sovereign debt”. Should there not also be a law that prohibits doing so using the backdoor of banks and bank regulations? 

The fact that banks all over Europe could lend to Greece against only 1.6 percent in capital seems to me a very close relative of “monetary financing of sovereign debt”. These regulations, when something goes wrong, as it is almost doomed to go, because of the distortions these produce, create its own set of problems. 

When Münchau, with respect to any official explicit target for interest rate spread writes “The market would test any published target” we might therefore have to add, for precision, “market and regulators”, I explain: 

There are havens perceived as very safe, Germany, and those perceived as not so safe, Spain, and that would, without any regulatory intervention, reflect itself in the interest rates. But, the way current bank regulations are set up, with bank lending to the officially safe havens requiring much less capital than when lending to those “not-safe”, the natural market cleared interest rate differentials based on risk, become so much larger.

Anyone who is really sincere about solving the European problem, or even about not making it worse, must either eliminate the discriminatory effect of these regulations, or make sure that the safe-havens transfer some of their almost ill-gotten interest rate savings, to those less safe havens that have had to pay higher than natural free market rates.

Unfortunately the fight for the best gate-watching positions is a never-ending story

Sir, I can certainly identify with Dr. Thomas Snitch’s despair when, quoted by Gillian Tett, he cries out “These folks would rather turn down the offer of free help to save the rhinos than to be put in a position where their annual report states that fewer animals are being taken by poachers” … and thus undermine their ability to raise money, “Wild animals, poachers and the human jungle” August 25. 

And quite often it is much worse, since “these folks”, these think-tank’s without ideas but with a “concern” that defines their business model, often monopolize the public debate on “their” issue. Indeed some of “these folks” are really like powerful multinational corporations operating with much less of that transparency they often accused others to be lacking. 

But Dr. Snitch, thanks to another gate-keeper, Gillian Tett, at least here got himself a chance to describe what he was up to. And that is much more than what others who are being ignored by the media and the journalists who, also feeling threatened, take refuge in the hierarchy of their own little net-works or in their own officially approved little intellectual silos. 

Thankfully the world is changing, and insignificant persons like me now have, because of the web, better chances of bypassing the gate-watchers in order to voice any significant concerns of theirs… and perhaps even to be able to challenge one or two hierarchies. 

PS. A Challenge!

No! The real “masters of the universe”, those self-appointed, those full of hubris, are the bank regulators.

Sir, Jonathan Ford refers to the bosses of hedge funds who manage about 10 percent of investment funds worldwide as and that in reference to these “it is hard to avoid the impression that hubris is a factor”, “The master of the universe are playing a loser´s game", August 25. 

Forget it! If there are some who can be defined as masters of the universe full of hubris, that is the bank regulators who play risk managers for the world, and on their own, without consulting with anyone, dole out the risk-weights which determine the capital requirements for the banks. 

In doing so, the regulatory nannies have caused obese and dangerous bank exposures to whatever was considered officially as absolutely “not-risky”, and anorexic bank lending to whatever was considered officially as “risky” like unrated small businesses and entrepreneurs. 

If hedge fund bosses do wrong, their clients lose, but when bank regulators do wrong, massively, and on a massive global scale, as they have done, then everyone loses, starting with those who as a result will become unemployed and those who might never ever get an employment. 

PS. “The Challenge”

FT, are you afraid of the Basel Committee on Banking Supervision curia excommunicating you?

Sir, you loudly preach from your very high pulpit, that the “non-partisan Congressional Budget Office’s updated [fiscal] forecast… should shock Congress out of its complacency…so as to put American’s wellbeing ahead of its differences…[though] even if they do find a solution; the outlook is hardly rosy”, “Vertigo atop the US fiscal cliff” August 24. 

And again I find myself wondering why you do not include in your sermon, some words on the fact that when bank regulations like the current are so much biased in favor of bank lending to those perceived as “not-risky”, and against those perceived as “risky”, this dooms the economy to dangerous obesity and simultaneous muscular dystrophy. Could it be that though you declare yourselves “without fear”, you are scared of what the high priests of the Basel Committee on Banking Supervision curia would have to say? FT excommunicated? 

Well, in the best protestant traditions, I at least am nailing up, wherever I can, my protest against that silly-nanny belief that economic prosperity can be reached, or even maintained, by avoiding, or even punishing, risk-taking and risk-takers, such as the small businesses and entrepreneurs. 

I also wonder what the US congress would have to say, if they understood that current regulations are making their bankers, in “the Home of the Brave”, to lend the umbrella when the sun is out much more than what Mark Twain ever thought possible, and to, similarly, take it away much faster than what Mark Twain could ever have imagined?

Sunshine rules might signify more darkness

Sir, those “Sunshine rules” you refer to August 23, namely the Sec ordering US-listed companies to disclose the payments they make to the host governments, are absolutely great news… for those countries where civil society is strong enough to matter... and governments have at least the intention of listening to it.

But, in those countries where civil society is truly weak, something which so often is the case of countries suffering the curse of abundant natural resources, those sunshine rules might only mean more darkness, as they would tend to exclude the sort of more reasonable or least unethical extractive industry corporations from participating, leaving the field open to the truly unreasonable and least ethical. 

Why not invest instead all these efforts in supporting the development of strong “independent” civil societies which can demand better results where it really matters, not in the corporate reports of companies listed in the stock-exchanges of developed countries, or in an annual report of a well intention NGO, but on their own oil-fields and mines? 

Now if the SEC would follow up this by approving a list of countries where a reasonable active participation of civil society existed, and in which therefore these sunshine rules would apply, and a list of those countries where they are impossible to apply, that could be more helpful, not only for us oil cursed citizens, but even for their own listed natural resource companies. 

PS. One of the main promoters of “sunshine”, which is good, is the Extractive Industries Transparency Initiative, and the Dodd-Frank Act even makes a direct reference to EITI. 

Nonetheless, EITI, as its second principle states: “We affirm that management of natural resource wealth for the benefit of a country’s citizens is in the domain of sovereign governments to be exercised in the interests of their national development.”, and that to me, as an oil-cursed citizen, is a totally unacceptable principle. 

I believe that the individual citizens will always, on average, make a better use of any natural resource blessings, than their government managing all of these… and using all of these so as to guarantee themselves some truly submissive citizens.

For the time being, in terms of grand Faustian bargains, the QEs are insignificant

Sir, Scott Minerd, referring to the quantitative easing programs warns: “Beware impact of central bank’s grand Faustian bargains” August 22. 

Frankly, as a grand Faustian bargains, the central banks QE’s do not even come close to when bank regulators, unbeknown to most, decreed, in Basel II, that even though banks had to hold 8 percent in capital when lending to citizens, like the small businesses, they needed to hold no capital at all, zero!, when lending to the emperor, even with a duration of 30 years, at least for as long as the credit rating agencies deemed the money printing press of the emperor to be infallible.