Tim Harford, what about taxing the sin of excessive risk aversion instead of subsidizing it?

Sir, I refer to Tim Harford’s “These are the sins we should be taxing” March 12.

Mark Twain supposedly said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” And we used to mock or even abhor the risk aversion there implicit.

But then came regulators and with their risk weighted capital requirements; which allowed banks to leverage more the equity with the safe than with the risky; which allowed banks to earn higher expected risk adjusted returns on equity with the safe than with the risky; which was a de facto tax on risk taking and a de facto subsidy of risk aversion; they made it absolutely certain that Mark Twain was more correct than ever.

And that is indeed socially harmful. Not only does it block the access of “the risky” to bank credit, the SMEs and entrepreneurs, something that causes both more inequality and lesser economic sturdy growth.

But in order for this truth to sink in, so as to do something about it, we need that persons like the Undercover Economist understand the difference between the possible short-term costs of risk taking, and the truly high and certain long-term costs of risk aversion.

Just because something is perceived risky does not mean it is risky, sometimes it means, ex post, that it is quite safe. Make sure you really know what is what in risk and sins, before you tax it. ​Know your base rate J

@PerKurowski ©

Artificial intelligence has a clear advantage over humans; a smaller ego standing in the way of admitting mistakes.

Sir, Murad Ahmed, writing about Demis Hassibis states: “At DeepMind, engineers have created programs based on neural networks, modeled on the human brain. These systems make mistakes, but learn and improve over time” “Master of the new machine age” March 12.

Ooops! I hope they do not use as models the brains of current bank regulators.

In 2007-08 we had a big crisis because AAA rated securities and sovereigns like Greece, perceived and deemed as safe, turned out to be very risky.

And what connected all that failure, was the fact that banks were allowed to hold very little, I mean very little, we are talking about 1.6 percent or less in capital, against those assets, only because these were ex ante perceived or deemed to be very safe.

Of course, anyone who knew anything about the history of financial crises would have alerted the regulators that to allow banks to have less capital against what is perceived as safe than against what is perceived as risky, was very dumb. That since major crises only result from excessive exposures to something ex ante perceived as risky but that ex post turns out to be very risky. And one of the main reasons for that is precisely that too many go looking for “safety”.

But now we are in 2016, and the issue of the distortion those capital requirements produce in the allocation of bank credit to the real economy is not yet even discussed. 

So before these human brain systems learn and improve over time from mistakes, they have to be able to understand these and, more importantly, to humbly accept these.

Frankly, artificial intelligence seems it could have an advantage over humans’, namely none of that human ego that so much stands in the way of admitting mistakes.

But also beware, were robots free of that weakening ego, they could conquer us!

@PerKurowski ©

What with Growth and Inequality, if regulators had imposed risk weighted bank capital requirements 150 years earlier?

Sir, you hold that “The IMF and the Peterson economists” who in the latter case is none other than Olivier Blanchard, the IMF’s former chief economist, “should not succumb to defeatism, nor to complaints in the financial markets that loose policy is creating distortions or doing more harm than good” “Concern, not panic, over the global economy” March 12.

But you have succumbed to silence what most creates harmful distortions in the allocation of bank credit to the real economy.

This September 2016, there will be 30 years since frightened regulators concocted the credit risk weighted capital requirements for banks.

By allowing banks to leverage more equity with the safe than with the risky, banks earn higher risk adjusted returns on equity with what is perceived or decreed as safe, than on what is perceive as risky, like for instance SMEs and entrepreneurs.

So let me just ask you again to test if your motto “Without fear and without favor” is for real, or just a marketing ploy.

What do you think would have happened if regulators had imposed such credit risk weighting 150 years earlier?

As I see it there would have been much less of that risk-taking our economies need to grow and move forward in order to not stall and fall.

And as I see it, by denying much more ”the risky” the opportunities of accessing bank credit, inequality would be much larger.

So Sir, I simply cannot understand how you can keep mum on such dangerous regulatory distortion.

Who gave unelected bank regulators the right to call it quits for our Western Civilization? Is that not a reason to panic?

@PerKurowski ©

Three questions that could help determine whether ECB’s Mario Draghi is for real, or just another Chauncey Gardiner.

Sir, Katie Martin, in Short View March 11 writes: Mario Draghi says that he still has ammunition left in his battle against deflation. But the question is whether he’s using it to shoot himself in the foot”.

Perhaps we should clarify that it is not really his ammo, and that the foot Draghi shoots, is our real economy.

And so now Draghi wants to “dose of cheap-as-chips cash for banks to lend to the real economy… “and even rewards banks for lending to the real world”

Why are the banks not doing that already? The simple answer is because of the restrictions that, in a severely bank capital constrained world, regulators, like Mario Draghi, have imposed with the risk weighted capital requirements for banks.

And so now Draghi wants to counter-distort one of his own distortions?

No, if Mario Draghi was working for me, he would be long gone, because he I believe he is inept and he has clearly failed.

John Kenneth Galbraith in “Money: Whence it came, where it went” wrote: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”. Well I am not pretending any knowledge, and I have sure asked for many explanations.

Again, why do we not ask Mario Draghi some easy questions? If he cannot give us answers we understand, then I hold he is, in the best of cases, just another misplaced figure like Chauncey Gardiner in Jerzy Kosinski’s “Being there”.

And that would make of most of you out there, sad characters that herald Draghi as visionary and quote him, without the faintest idea about what he's really saying.

Question 1. Mr. Draghi why do you believe the capital banks should be required to hold, against unexpected losses, should be based on the perceptions of expected credit losses that banks already clear for with the interest rates (risk-premiums) and the size of the exposure?

Question 2. Why do you think that allowing banks to leverage differently different assets, which clearly affects the risk-adjusted returns on equity each asset group provides, does not distort the allocation of bank credit to the real economy?

Question 3. What is the purpose of banks? I mean when stress-testing banks, why are you only interested in what’s on their balance sheets, and not in what might be lacking, like loans to “risky” SMEs and entreprenuers?

Mr Draghi, we are all ears!

@PerKurowski ©

Is Mario Draghi doing his ”whatever it takes”, only to hide his and his bank regulation colleagues’ mistakes?

Sir, Claire Jones writes: “The ECB’s big idea to silence the doubters is an auction of their cash that will, if it works, in effect involve central bankers paying banks to lend to businesses “Central bank flexes its muscles in effort to silence doubting voices” March 11.

For over a decade the regulators, acting like if banks did not perceive credit risk, have with their risk weighted capital requirements for banks de facto stopped banks from lending to “risky” businesses. And now, instead of getting rid of such odious regulatory discrimination they want to pay the banks to lend to businesses.

When is enough enough? Mario Draghi has clearly evidenced that as a bank regulator he is an absolute failure and has no idea of what is going on… or worse is he only trying to do the “whatever it takes” only to hide his mistakes.

Sir, in your editorial today you argue: “Now it is time to allow Draghi’s bold approach to work. Wrong! It is high time to get rid of him How many failures and mistakes are needed? 

@PerKurowski ©

The by far best “collect as you go” pension plan, is built around loving kids and a healthy economy.

Sir, I refer to Michael Skapinker’s “Five possible scenarios for a ‘work till you drop’ world” March 10.

In my book “Voice and Noise” of 2006, on the issue of “Social Security in Real Terms” I wrote:

“In order for your savings and social security investments to be worth something when you need them, the real economy must be in a reasonable condition at the time of your selling your investments. When I hear the many discussions about the financial preparation needed to accommodate for the upcoming demographic changes, I find it truly amazing how little is being said about the economy in real terms.

Considering that there will be many fewer young ones to drive people around and shovel snow, much of today’s beautiful real estate might drop in value when the elderly start selling their houses to live close to a metro, hospital, and more reasonable weather conditions. So, before putting the money away in a private accumulation trust I think we need to rethink the whole retirement strategy.

Also we should never forget that historically, through all economic cycles, there is nothing so valuable in terms of personal social security as having many well-educated loving children to take care of you, and that you can’t, in real terms, beat that with any social security reform.”

I have the very loving very great kids, but I am still very concerned. Regulators concocted credit-risk weighted capital requirements for banks, and that is seriously distorting the allocation of credit to the real economy. If that mistake is not soon corrected, our economies are doomed to stall and fall.

How many kids of working age are not already living in the basements of their ‘work till you drop’ parents?

Sir, as I see it, we have no choice but to fire, immediately, the current bunch of dumb bank regulators.

@PerKurowski ©

Central banks, when are you going to lift that dangerous capital control the Basel Commitee concocted? Its urgent!

Sir, Donal O’Mahony speaks out loud and clear. We do have many reasons to question whether central bankers have a good idea about what they are doing, or only making it worse with their "we invent as we go along" creativity. “Experimental policies of central banks pose threat to confidence” March 10.

O’Mahony refers primarily to QEs and zero or even negative interest measures. I personally concern myself much more with their much more insidous and so very dangerous distortion of bank credit allocation to the real economy.

Their credit risk weighted capital requirements for banks, are in all essence a strict capital control. It tells banks “Lend to ‘the safe’, the sovereigns and members of the AAArisktocracy, and stay away from ‘the risky’, the SMEs and entrepreneurs”

That capital control must be lifted, urgently, if we are ever going to have a chance of a sturdy economy able to generate those jobs our kids need.

Sir, you know I have mentioned it before but again, between you and me, perhaps we should seriously consider firing all central bankers. They are just too dangerous for our health.

Already in 1995, in “The Confidence Game” Steven Solomon wrote of “how central bankers have shaped the course of economic and political events in the past fifteen years, why their influence relative to elected political leaders has reached a historical zenith, and how it reveals one of the greatest pressing dangers facing free democracy.”

@PerKurowski ©

Why is IMF silent about the fact that bank regulators, slowly but surely, are causing the economies to stagnate?

Sir, Shawn Donnan, Chris Giles and Gabriel Wildau report that “IMF calls for global action to lift demand as China exports fall” March 9.

With the credit risk weighted capital requirements for banks that allow banks to leverage more their equity with what is ex ante perceived as safe than with was is perceived as risky, banks earn higher expected risk adjusted returns on equity on what is “safe” than on what is “risky”. And as a consequence “risky” SMEs and entreprenuers do not have adequate access to bank credit. And that, slowly but surely, must cause the economy to stagnate. There’s no doubt about that.

When you stress test banks, the most important issue could be what is not on banks’ balance sheets.

IMF’s David Lipton warns the global economy is “clearly at a delicate juncture” and that “Now is the time to decisively support economic activity and put the global economy on a sounder footing,”.

And so I ask again: Why does IMF insist on keeping silence on the odious regulatory distortion of the allocation of bank credit to the real economy?

Mme Christine Lagarde: Ask!

@PerKurowski ©

If regulators insist on that any information gathered by banks must be doubly considered, that would be real dangerous.

Sir, Martin Wolf writes: “Finance is an information business. Indeed it already spends a higher share of its revenues on information technology than any other. It seems ripe for disruption by information technologies. Consider its three essential functions: payment; intermediation between savings and investment; and insurance. All these activities are information-intensive.” “Good news — fintech could disrupt finance” March 9.

Banks already perceived information about credit risks, and cleared for it with interest rates and the amounts of their exposures... and they were not doing that bad when it came to identify “the risky”, where they sometimes really failed, badly, was when they identified some as very safe.

But then came the regulators and told the banks they also had to consider the same perceived risks in the capital. And so banks did doubly stay away from the risky, and doubly fall into the traps tended by the false safes.

And so if all that information is going to be of value for the banks and for us, be sure to keep the regulators away from it.

Martin Wolf also quotes John Kay on that “parts of the financial sector today . . . demonstrate the lowest ethical standards of any legal industry”.

Not so. Compared to the ethical standards of regulators who abusing their powers distort the allocation of bank credit to the real economy; and by discriminating against the opportunities for fair access to bank credit of “The Risky” increase inequalities, one could argue that bankers are saints.

@PerKurowski ©

Day by day, the world is losing more and more, of that incredible valuable resource known as blissful ignorance.

Sir, Mohamed El-Erian writes: “These days, even small changes to market paradigms cause outsized price moves, contagion, and unsettling correlations among asset classes.” “Relying on central bank policy manoeuvres risks more volatility” March 8.

Indeed but that is not solely the result from what central banks do.

In 2001 in an Op-Ed I wrote: “The development of decision-making processes has benefits but also risks. Thus we see that the speed of information itself, which promotes quick and immediate response, can exacerbate problems. Before, those who took the problem home to study it, and those who simply found out late, provided the market a damper, which often might have saved it from hurried and ill-conceived reactions.”

When I was young and off to a boarding school in Sweden, with my parents living in Venezuela, I might have sent them one letter per year. They opened it and gladly determined that I was doing ok. Nowadays, if any of my daughters do not report to their mother sort of every six hours, all sort of possible volatility breaks lose.

@PerKurowski ©

FT, when favoring bold action, why not begin by asking Mario Draghi and other bank regulators to resign?

Sir I refer to Claire Jones’ “Draghi reputation on line over recovery pledge” and your own “ECB’s greatest risk is the danger of doing nothing” March 8.

What can I say? Mario Draghi belongs to that bunch of bank regulators who believe that something rated below BB-, that which ranges from “highly speculative”, through “extremely speculative” and up to “default imminent”, is much more dangerous to banks than what is perceived as safe. Does that not say it all? As a regulator who with the risk weighted capital requirements for banks evidences that belief, he simply does not know what he is doing.

Now “ECB views its shift below zero interest rates as a complement to its quantitative easing program. Both policies, it says, force banks and investors to buy riskier assets to compensate for the costs of negative rates.” So Draghi now wants to “Force banks and investors to buy riskier assets”, while leaving intact the regulatory incentives against that? It is just so dumb!

You cite Draghi with “they warn us about the side-effects and risks of what we’re doing. But what I never hear them discuss is the risks of doing nothing.”, and you opine that “Not only are the risks of inaction greater than the risks of action, but that balance has also continued to tilt in favour of doing more.”

I fully agree, so why not begin with a general change of all bank regulators that had anything to do with that fatal systemic error in Basel I, II and III that no one discusses. They did the Eurozone in!

Welcome to the distorted new world of banking!

PS. I have definitely been in favor of doing more

@PerKurowski ©

The Banking Standards Board should also require bank regulators to uphold higher ethical standards

Sir, Patrick Jenkins’ discusses what the Banking Standards Board can do influencing the ethics of banks. “Banks gain help on the scandal-strewn road to better behaviour” March 8.

If I were the BSB then, in the case of the fatidical mis-sold mortgage-backed securities, I would come out swinging against the regulators stating:

How on earth did you allow us banks to buy AAA to AA rated securities against only 1.6 percent in capital, meaning we could leverage our bank equity 62.5 times to 1 with that kind of paper? Don’t you know there are very few human bankers able to resist such temptation because, if they did, they would find other banks earning much higher expected risk adjusted returns on equity, leaving them as the dumb kids of the block, or as those who refused to dance while the music was playing?

And now, should those who created the temptations, the devils in the play, be able to go free, while we who fell for the temptations, the weak in flesh, shall bear all guilt? No! That’s not acceptable!

And, if I were accused of the manipulation of Libor, I would at least declare in my defense that such manipulation was really quite harmless when compared to the regulators’ manipulation of the allocation of bank credit to the real economy. That manipulation, which regulators committed with their risk weighted capital requirements for banks, was and is also something completely unethical.

@PerKurowski ©

Wolfgang Münchau has not earned the right to now appear as the one demanding “banks to take on more risk”

Sir, Wolfgang Münchau writes “One useful measure that would bring immediate benefits would be purchases of non-performing loans in the banking sector…. The objective should be not to protect bank profits but to get banks to take on more risk” “Eurozone woes demand a much bolder response” March 7.

And he also writes that he favors helicopter droppings over QEs because that “policy would bypass governments and the financial sector. The financial markets would hate it. There is nothing in it for them. But who cares?”

Is he wrong? Of course not! But who is he to now demand that kind of bold action?

Over the years Münchau has kept mum on all letters I sent reminding him of the dangers of credit risk aversion caused by the risk weighted capital requirements for banks, like one in 2007. And equally mum on the letters were I informed him that, because of such risk weighing, the liquidity provided by QEs did not reach where it was most needed by the real economy, like one in 2012

Here is but one example of my many letters to Wolfgang Münchau and that by the way suggests the capitalization he now speaks of.

Sir, you can find many many more letters to Münchau here:

And even though ideas can be dressed up in different words Münchau should be careful. “Never plagiarize. Always attribute” is a simple, clear statement in the Society of Professional Journalists Code of Ethics that leaves no room for ambiguity.

@PerKurowski ©

The Basel Committee for Tropical Forest Supervision fumigates “risky” creatures and thereby kills its biodiversity.

Sir, Lawrence Summers discusses “the challenges currently facing macroeconomic policymakers in the US and the rest of the industrial world”. He expresses concern that policies could be behind the curve and believes central bankers’ communicate “a sense that there was relatively little left that they can do to strengthen growth or even to raise inflation” “A world stumped by stubbornly low inflation” March 7.

Oh no! There is much to do. Urgently!

Rain forests provide ecosystem services that play an important role in maintaining biological diversity, global climate regulation, disease control, pollination and much more.

What would we opine about forest guardians eradicating scrub-itch mites, ticks, spiders, scorpions, centipedes, wasps, hairy caterpillars, leeches, snakes, stinging tree, lawyer vine and other of the natural habitat, only on account that these are dangerous creatures?

Well that is exactly what bank regulators, central banks, have been doing to our real economies. With their credit risk weighted capital requirements for banks, they fight the SMEs and entrepreneurs only on account these are risky from a credit point of view.

And they are so fanatical that they do not warn bankers about hidden unexpected ex post dangers, they act even when bankers ex ante perceive the scorpions they know they should expect to be dangerous.

And of course our real economies, lacking more and more in diversity, stop to function as they should. 

And so we must urgently get rid of the current dumb bunch of forest guardians who, when trying to save banks from “The Risky”, are dangerously fumigating our real economies. The fact that even the central bankers communicate there is little they can do, is just another clear sign it is hight time for that.

@PerKurowski ©

Martin Wolf prefers government bureaucrat’s spending money that is not theirs over bankers making loans to SMEs

SMEs and entrepreneurs have less access to bank credit because banks are required to hold more of that scarce bank capital when lending to them, than when for instance lending to the sovereign or to members of the AAArisktocracy. And that is so because SMEs and entreprenuers have been deemed as risky by regulators, even when by being perceived ex ante as risky, de facto makes these borrowers safer for the bank system.

But Martin Wolf has clearly evidenced over the years he is not a slightest concerned with that distortion in the allocation of bank credit to the real economy, something which among other permits the supposedly "infallible" sovereign to have more than the usual preferential access to bank credit.

Now Wolf argues again, for the umpteenth time, that: “It is more important to create a robust financial sector. Yet pressure from the Treasury today seems to be to relax constraints. That may well be far riskier for the UK economy in the long run than modest fiscal deficits.” “Osborne’s desire to cut spending makes little sense” March 4.

I cannot but conclude that Martin Wolf, between bankers making loans to SMEs and entrepreneurs, or government bureaucrats spending money that is not theirs, much prefers the latter. I don’t!

@PerKurowski ©

The biggest operational risk the real economy currently faces, are bank regulators who do not understand they distort

Sir, Lorenzo Bini Smaghi discusses the difficulties of quantitative easing to be of any use in the context of “the excess of savings over investments, at the global level but again particularly in Europe.” “If easing is not Europe’s answer, an alternative is elusive” March 4.

Once again, for the umpteenth time, I remind you that much investment is not taking place only as a consequence of the distortion in the allocation of bank credit to the real economy produced by the risk weighted capital requirements for banks. These hinder the access of SMEs and entreprenuers to bank credit, only because regulators perceive these as “risky”… as if bankers had no idea about that risk.

I repeat: Those perceived as “risky” are by that fact alone, ex post, made safer. Those perceived as “safe” are by that fact alone, ex post, made riskier. .

“The only thing necessary for the triumph of evil is for good men to do nothing” Edmund Burke

“The only thing necessary for bad regulations to reign, is for specialized media to keep mum about it” Per Kurowski

@PerKurowski ©

If Trump wins that could be because some journalists, like Martin Wolf, withheld the truth of what has happened

Sir, Martin Wolf writes “The US is the greatest republic since Rome, the bastion of democracy, the guarantor of the liberal global order. It would be a global disaster if Mr Trump were to become president” “How great republics meet their end” March 2.

Absolutely, I agree 100 percent.

But, in Charles Goodhart’s “The Basel Committee on Banking Supervision: A History of the early years 1974-1997:” 2012, Cambridge Press Goodman (p.167) refers to Steven Solomon’s The Confidence Game (1995) we read:

"On September 2, 1986, the fine cutlery was laid once again at the Bank of England governor’s official residence at New Change… The occasion was an impromptu visit from Paul Volcker… When the Fed chairman sat down with Governor Robin Leigh-Pemberton and three senior BoE officials, the topic he raised was bank capital…

At dinner the governor’s hopes had been modest: to find areas of sufficient convergence of goals and regulatory concepts to achive separate but parallel upgrading moves…

Yet the momentum it galvanized… produced an unanticipated breakthrough of a fully articulated, common bank capital adequacy regime for the United States and United Kingdom. This in turn catalyzed one of the 1980’s most remarkable achievements – the first worldwide protocol on the definitions, framework, and minimum standards for the capital adequacy of international active banks…

They literally wiped the blackboard clean, then explored designing a new risk-weighted capital adequacy for both countries…

It included… a five-category framework of risk-weighted assets… It required banks to hold the full capital standard against against the highest-risk loans, half the standard for the second riskiest category, a quarter for the middle category, and so on to zero capital for assets, such as government securities, without meaningful risk of credit default.”

And that started the mother of all distortions to the allocation of bank credit to the real economy, that which got us into the economic low growth mess we’re all in.

And so when Martin Wolf now, with respect to Trump, worries that “An American ‘Caesarism has now become flesh” I have to ask him: Where were you Wolf when American and British regulators believed themselves to be Caesars and acted like such?

Martin Wolf, by defending the bank regulation's Caesars, you might very well be part of the reason why Donald Thrump can now aspire to be a Caesar. Sleep on that!

@PerKurowski ©

The limits to productivity growth are also defined by the willingness to take risks.

Sir, John Kay writes “The limits to productivity growth are set only by the limits to human inventiveness” “Prepare for the dawn of a second special century” March 2.

Wrong! Wrong! Wrong! These are also set by the willingness to pursue that human inventiveness no matter how risky it is.

And that is what our society has much stopped to do, primarily because our regulators gave our banks incentives to embrace what is perceived as safe and stay away from what is perceived as risky; and this even when (supposedly) according to Mark Twain “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”

Risktaking is the oxygen of development and a must for muscular and sustainable economic growth.

As is our banks do not finance any longer the riskier future, they just refinance the safer past.

@PerKurowski ©

Urgently fire those damn bank regulators who abandoned the young and ignored their needs for jobs and a future

Sir, I refer to the true tragical horrors described by Tobias Buck in “The fear and despair of Spain’s young jobseekers” March 2.

And I tell you again, though you will most probably ignore me again, that nothing as serious as that would have happened had not some few powerful and arrogant bank regulators, while trying to level the field for banks to compete, unleveled the real economies’ access to bank credit.

Read the chapters of “Capital adequacy and the Basel Accord of 1988” and “The BCBS and the social sciences” in Charles Goodhart’s “The Basel Committee on Banking Supervision: A History of the early years 1974-1997” 2012, Cambridge Press and you will understand. There is not one single reference to that how banks allocate credit to the real economy was of any concern whatsoever to regulators. And most probably it still is not.

Had they given that banks’ social purpose the slightest thought, they would have understood, unless too dumb, that their credit risk weighted capital requirements for banks impeded banks to adequately serve the economy.

Allowing banks to leverage equity differently based on “risk”, allows banks to earn higher risk adjusted return on equity on what is perceived or deemed to be“safe”, than on what is perceived as “risky”

So now “The safe” get too much credit on too lenient terms, while “The Risky” have no access to bank credit, that is unless they pay much higher risk adjusted premiums than they would ordinarily have to pay in an undistorted market.

Houses are safe so lend to that, but SMEs and entreprenuers the job creators are risky so cut them off!

Sovereigns are safe so lend to these, but the private sector is risky so, except for the AAArisktocracy, cut it off!

And so now our banks do not finance the “riskier” future they just refinance the “safer” past.

These regulators must be stopped! They are financial terrorists who threaten the future of our kids. And you FT must stop covering up for them.

“A ship in harbor is safe, but that is not what ships are for” John Augustus Shedd, 1850-1926

But not even ships are safe in a safe harbor if that harbor gets to be dangerously overpopulated.

@PerKurowski ©

Here a call in Spanish to the young to demand the risk taking they need

Here a letter in Spanish to the King asking for him to help the youth of Spain

What behavioral theory explains how hard it can be for even those who know it to understand?

Sir, Tim Harford discusses “base rate” and admonishes us:“It is easy to leap to conclusions about probability, but we should all form the habit of taking a step back instead. We should try to find out the base rate, or at least to guess what it might be. Without it, we’re building our analysis on empty foundations” “How to make good guesses” February 26.

So Mr. Harford: Clearly an asset that is evaluated as risky is normally expected to cause larger losses to a bank than an asset that is perceived as safe. But, what is the base rate for that a bank would create excessive exposures to what is ex ante perceived as risky? Is really what’s risky more dangerous to the bank system than what is perceived or has been deemed as safe? 

What sort of behaviorial explanation would Daniel Kahneman, Amos Tversky, Maya Bar-Hillel, Richard Nisbett, Eugene Borgida, Philip Tetlock and other experts give to the fact that a person like the Undercover Economist, even when in possession of the required knowledge, just cannot accept the fact that the pillar of our current bank regulations, the credit risk weighted capital requirements, is built upon a completely wrong foundation? 

@PerKurowski ©

Whether there are thousands of small banks, or just a few TBTF, if regulations are bad and distort, it’s all the same shit.

Sir, I refer to John Dizard’s “Banks are destined to accept break-ups in exchange for lighter regulation” February 27.

It should not be a question of heavy vs lighter regulations. Many of us would like to see banks accepting break-ups as a result of better regulations. Because frankly, it is silly to break-up banks, if they are anyhow going to be joined together in a lousy regulatory matrimony.

2001, in an Op-Ed, I warned: “Today, when the world seems to be asking much for bank mergers or consolidations, I wonder if we on the contrary should be imposing on banks special reserves depending on their size. The bigger the bank is, the worse the fall, and the greater our need to avoid being hurt.” 

But, just as important, in the same Op-Ed, I also warned about the risk of regulations, in the following terms:

“The regulatory risk: Before there were many countries and many ways of how to regulate banks. Today, with Basel proudly issuing rules that should apply worldwide, the effects of any mistake could be truly explosive.

“Excessive similarity: Encouraging banks to adopt common rules and standards, is to ignore the differences between economies, so some countries end up with inadequate banking systems not tailored to their needs. Certainly, regulations whose main objective appears to be only to preserve bank capital, conflict directly with other banking functions, such as promoting economic growth, and democratize access to capital.”

And Sir, as you well know, I opine that when the regulators decided to introduce credit risk weighted capital requirements for banks, which distorted the allocation of bank credit to the real economy, then they blew it for all of us. And our economies are still suffering, because these regulators just don’t want to admit they blew it, and for what reasons.

For instance when John Dizard mentions “securitisation fakery”, he should not forget that the main driver of such fakery was the fact that there was going to be very different capital requirements depending on how that securitization got rated… and that distortionary incentive is still well alive and kicking more than ever.

So at the end of the day, if all AAA rated securities backed with lousy mortgages to the subprime sector were held by one or by a thousand banks, it’s all he same shit. 

Stefan Ingves the current chair of the Basel Committee, but also the chair of the Swedish Riksbank, recently had this to say of Swedish banks: “Banks have changed the way they calculate risk weights, the risk-weighted capital adequacy therefore look good. But in the end they do not have much more capital than before the financial crisis.”

Sir, can we really take our current regulators to the bank?

PS. For all practical purposes it would seem I have been as much censored by the Government of the Financial Times than as I have been by the Government of Venezuela. J

@PerKurowski ©

FT, once again you ignore, God knows why, one of the prime causes for “The precarious state of the global economy”

Sir, I refer to your editorial “The precarious state of the global economy” February 26.

For the record I notify you that you have once again ignored in your analysis the following, God knows for what reason: 

Current credit risk weighted capital requirements for banks, especially in times of scarce bank capital; by allowing banks to earn higher expected risk adjusted returns on equity on what is perceived or deemed to be safe asssets than on risky assets; is hindering banks from lending sufficiently and in sufficiently reasonable conditions to those ex ante perceived as risky, like the SMEs and entrepreneurs. And that must obviously have a big negative impact on the economy.

And seemingly all for nothing, Stefan Ingves, the current chair of the Basel Committee, when as the chair of Sveriges Riksbank, in November 2015, in Svenska Dagbladet commented on Swedish banks had this to say: “Banks have changed the way they calculate risk weights, the risk-weighted capital adequacy therefore look good. But in the end they do not have much more capital than before the financial crisis.”

FT, might your stubborn silence about my arguments have painted you into a corner?

@PerKurowski ©

“Government, I will lend you fresh money if you favor me with huge risk premiums” Does that not sound a bit corrupt?

Sir, Max Seddon and Laura Noonan write about the plans of Russia to issue its first sovereign bond since the US and Europe imposed sanctions on Moscow, and of some reactions of Washington to that. “Russian bond poses dilemma for bankers” February 26.

And in this respect: “The Treasury told the banks that while there was technically no ban against helping the Russian government raise money, the banks would have to be mindful of the fact that the money could be diverted into activities that were not consistent with US foreign policy.”

But what about the case of money that could be diverted into activities that was not consistent with Russian citizens’ interests? Is that irrelevant?

I ask because I am Venezuelan, and the government of my country has taken on loads of debt, something that clearly is not justifiable in the midst of an incredible oil boom. And all this odious credit/debt is now supposed to be repaid by all citizens who had absolutely nothing to do with how the loan proceeds were used, in much because of a big lack of transparent information.

And the financier’s of Venezuela have been quite aware that things in Venezuela were not fine and dandy. Among publicly notorious issues was that the government was selling oil to some countries a highly subsidized prices for its own political benefit; giving away gas to its own citizens for a value that exceeded all social spending put together; the existence of rampant corruption; and that its human right’s behavior was being questioned over an over again.

But the financiers loved the risk premiums, and so I ask:

In the case of a loan to an individual government official in return for a favor, there would be no doubt that it could be classified as an act of corruption, and the financier could be held liable in the US under the Foreign Corrupt Practices Act.

But, what about a loan that provides money to a whole government, in return of the favor of extravagant risk premiums, could that not also be classified as an act of corruption?

The world no doubt needs a Sovereign Debt Restructuring Mechanism (SDRM) but, if that is going to help the citizens of the world, which it primarily should do, that must begin by making clear the difference between bona-fide normal credits and odious credits.

@PerKurowski ©

For not questioning the IMF staff sufficiently, Christine Lagarde might, sadly, not deserve her second term

Sir, Vanessa Houlder lauds Ms Lagarde for having “frequently deferred to the fund’s staff in formulating policy” “Lagarde deserves her second term at the IMF” February 25.

That is indeed laudable, but that does not exonerate her from posing the questions that need to be made.

On several occasions I have had the opportunity to ask Ms Lagarde, and IMF staff, about the wisdom of credit risk weighted capital requirements for banks imposed by bank regulators.

Specifically, as an example, here follows two simple question the General Manager of IMF should make and should expect the staff of IMF to answer in unequivocal terms:

Question 1: Why do you think that the risk-weighted capital requirements for banks, which allow banks to earn higher risk-adjusted returns on equity when lending to "the safe" than when lending to "the risky", like SMEs and entrepreneurs, do not dangerously distort the allocation of bank credit to the real economy?

Question 2: If no bank crisis ever has resulted from excessive bank exposures to what was ex ante perceived as "risky", as these have always resulted from too large exposures to what was ex ante perceived as "safe", why do you require a bank to hold more capital when lending to "the risky" than when lending to "the safe"?

If only Ms Lagarde had officially asked those simple questions, not allowing for any type of evasion, then perhaps bank regulations might have look quite differently; and the world’s economy be in a much better shape.

But she, apparently, has not!

PS. For a starter IMF research should try to answer: How many bank loans to SMEs and entrepreneurs have not been awarded worldwide, during the last decade, only because of the risk weighted capital requirements for banks: ten thousands, hundred thousands, millions?

@PerKurowski ©