Auditing is important, but what causes a disaster, is more important than how it is being accounted.

Sir, “FT Big Read. Auditing in crisis: Setting flawed standards” of August 2, discusses, among other, the huge divergence of figures in the auditing of the value of derivative exposures of AIG and of Goldman Sachs, even though their auditor was the same, in this case PricewaterhouseCoopers. 

That it was “striking how little was verifiable, that there were few credible market prices, let alone transactions, to support the key valuations”, explains much of the divergence.

Sharon Bowles, former chair of the European Parliament’s economic and monetary affairs committee explains it with: “Accounts have always contained estimates; think of the provisions companies make against foreseeable future losses, but the un-anchoring of auditing from verifiable fact has become endemic.”

That “un-anchoring from verifiable facts” is not limited to auditing. 

Sir, for the umpteenth time, without absolutely no verifiable facts, regulators concocted their risk weighted capital requirements for banks, based on the quite infantile feeling that what was perceived risky must be more risky to the bank system than what was perceived safe. In fact what could have been verified, if only they had looked for it, was the opposite, namely that what’s perceived safe is more dangerous to our bank systems than what’s perceived risky.

With that the regulators assigned to AAA rated AIG, by only attaching its name to guarantee an asset, the power to reduce the capital requirements for investment banks in the US, and for all banks in Europe, to a meager 1.6%. That translated into an allowed 62.5 times leverage. Let me assure you Sir that without this the whole AIG and Goldman Sachs incident described would never have happened. 

As always, what causes the problems is much more important than how the problems are accounted for. Though of course I agree, sometimes bad-accounting could in itself be the direct cause of the problems. 

The article also refers to “the so-called efficient markets hypothesis… that now somewhat discredited theory”. Sir, no markets have any chance to be credited with performing efficiently with such kind of distortions. For instance how verifiable is it now that sovereign debt is as risk-free as markets would currently indicate, when statist regulators have assigned it a 0% risk free weight, and are thereby subsidizing it?

@PerKurowski

A Universal Basic Income is a prime free market oriented “instrument of national togetherness”

Sir, Janan Ganesh writes about how the fact that “America has a large, complex and redistributive state…with some public assent”, has moved the floor for many traditional republicans, and has favored Trump”, “The end of the Republican free-market ticket”, August 2.

If you are a democrat or a republican who do not belong to the establishment, and who do not like the idea of having to court bureaucrats for any assistance that might be needed more and more, how do you deal with that?

As a Venezuelan, nauseated from seeing how its government has handled centralized oil revenues, I pray for all citizens to be in their own hands, using the free markets to decide what to do, than for them to be in the hands of odious redistribution profiteers. And so I do favor a Universal Basic Income.

And I believe an UBI could also signify a very important unifying bridge sorely needed in a world with so much polarization.

Of course since redistribution profiteering or the exploitation of crony statism exist in all political camps, we should expect all its enemies to circle their wagons and do what they can to stop UBI from reducing the value of their franchise. One of their first lines of defense, is helping to push an UBI into promising way too much, so that it clearly become fiscally unsustainable. Another one is arguing that would exacerbate social laziness.

I have no idea where long-term a UBI would lead us, but I wish we could start with one small enough to help everyone to get out of bed, but not so large so as to allow anyone to stay in bed. Around the corner, or probably in many ways even here, we will need decent and worthy unemployments, and UBI must surely be part of the toolbox for that. 

As a UBI does in fact represent a Societal Dividend, it should appeal to both those who want more free markets and those who focus more on social responsibilities. That sounds very much like an instrument for the centre-left-right to embrace the free market and “the state as an instrument of national togetherness”.

http://myubi.blogspot.com/2017/01/my-universal-basic-income.html

@PerKurowski

What if Germans knew German authorities approved of giving Greece a 0% risk weight?

Sir, Mehreen Khan writes, “hawkish governments, led by Germany… are reluctant to award Greece more generous terms that mean their taxpayers are not paid back in full” “IMF signals need for more Greek debt relief” August 1.

The historical fact is that European central bankers, for the purpose of the risk weighted capital requirements for banks, assigned Greece a 0% risk weight. That meant banks needed to hold no capital (equity) when lending to Greece. That meant that among other German banks, caused Greece to take on that excessive debt that lead it to its current tragic predicament.

Some will argue that Greece also played statistical shenanigans with its economic data. That is true, but if German banks had to hold as much capital on loans to Greece than what they needed to hold against loans to German entrepreneurs or German small businesses, you could bet your last Deutsche Mark, sorry your last Euro, on that German banks, no matter how good economic data on Greece looked, would not have lent it a fraction of what they did. 

And now IMF’s calculations find Greece’s debt costs will “begin an uninterrupted rise” after 2038, to about 20 per cent of the country’s gross domestic product every year.” Sir, is it really fair to single out some groups of European citizens to pay for the mistakes of everyone’s European authorities? Should that not be a totally shared responsibility?

Germans should be aware that at this very moment German banks, are required to hold much less capital when lending to its government or to some other governments, than when lending to German citizens… and that dooms Germany, sooner or later, to end up being another over-indebted Greece. And that applies to banks and nations much everywhere.

May I make a suggestion to Germans, and all Europeans, and all Americans, and all other? If so, that would be to get rid, immediately, of bank regulators that are either so statist so as to assign the sovereigns a 0% risk weight, or so loony so as to believe that what is perceived as risky is more dangerous to their bank system than what is perceived as safe.

PS. And don’t tell us they did not know they were favoring sovereign debt so much

PS. Some in Germany are aware of the problem

@PerKurowski

I am not sure what, but, to hold the Eurozone together, requires something politically very difficult to be done.

Sir, you write: “IMF…economists reckon the real exchange rate was between 10 and 20 per cent weaker than appropriate in Germany, which continues to run huge trade surpluses, but overvalued by between 3 and 10 per cent for Spain. This is not a problem that a central bank can fix” “Central bankers and currency conflicts” July 28.

That is a central problem with the Euro, from day one, from when the bridges were burnt, and way too little has been done to solve it, in fact most efforts seem to have been to ignore it. 

And Sir, don’t tell us that central bankers have the right to be so unaware of this problem, so as for instance having assigned Greece a 0% risk weight, which caused Greece run even larger deficits, and Germany even larger surpluses, all mostly financed by German and French banks.

And, truthfully, have central bankers, with their hubris filled “whatever it takes” messaging communicated sufficiently their limitations to the politicians? I don’t think so.

What can be done to solve it? I have no firm idea but, what about a Euro effect compensation tax, by which surplus countries would be charging higher sales taxes than deficit countries, and all those revenues were shared out to all European equally by means of a Universal Basic Income? Would that be politically impossible? Perhaps, but if not something politically very difficult is done about this problem, it will become politically impossible to hold the Euro are together. 

The governments, the European Parliament, the Council of the European Union and the European Commission, cannot persist counting on European central bankers, like a Mario Draghi, to solve it. 

@PerKurowski

The access to bank credit war might be more dangerous than trade wars, but gets much less attention.

Sir, Cecilia Malmström, the EU’s trade commissioner when discussing the threat of trade wars writes about the need for“developing tools that allow instances of uncompetitive and unfair behaviour to be addressed quickly, whether these are linked to state intervention or to countries acting unilaterally on the international stage. It would also require greater control over subsidies and the operations of state-owned enterprises, for instance.”, “Reform rules-based trade before it is too late” July 27.

Absolutely, but how sad it is that another war waged with tariffs and subsidies, that of the access to bank credit war, does not receive remotely the same attention.

In a letter the Washington Post recently published I argued: 

“The risk-weighted capital requirements for banks also translate de facto into subsidies and tariffs, which have resulted in a too much-ignored allocation of bank credit war. 

One consequence is that those perceived as risky, such as entrepreneurs, have their access to bank credit made more difficult than usual, and our economy suffers. Another is that by promoting excessive exposures to what is especially dangerous, because it is perceived as safe, against especially little capital, guarantees that when a bank crisis results, it will be especially bad. 

In terms of Mark Twain's supposed saying, these regulations have bankers lending out the umbrella faster than usual when the sun shines and wanting it back faster than usual when it looks like it is going to rain.”

That war has among others assigned a risk weight of 0% to sovereigns and one of 100% to citizens, which allow governments to have “uncompetitive and unfair” access to bank credit. It will, as it destroys the markets capacity to signal the rates effectively, cause the over indebtedness of all nations… 0% risk weighted Greece was just a small preview of the tragedies to come

@PerKurowski

Should central bankers answer my questions, or are they better off ignoring these?

Gillian Tett writes: “A century ago…central bankers barely talked to the public. Montagu Norman, the Bank of England governor from 1920 to 1944, is thought to have said: “Never explain. Never excuse.” That was partly because bank chiefs did not expect ordinary mortals to understand finance. But they also believed aloof detachment increased their authority.” “Should central bankers engage with the public?” July 28.

Sir, consider that I have with all means, even begging journalists to ask the questions, not been able to get an answer on something that should be very much within the general area of interest and responsibilities of a central banker, namely bank regulations.

My questions are simple and straightforward.

Why do you think that the regulators think that what is perceived as risky is more dangerous to our bank systems than what is perceived as safe? Could it be because regulators look at the risk of the assets of a bank, like bankers do, and do not look at the risk those assets could pose to the bank system, as regulators should do?

Why do you think that allowing banks to leverage differently their capital (equity) with assets based on different capital requirements, could not very dangerously distort the allocation of bank credit to the economy?

When are those European central bankers/regulators who assigned a 0% risk weight to Greece, going to be named and shamed, for dooming that nation to the so tragic consequences of excessive public debt?

Sir, “If Montagu Norman saw [my questions] what would he make of it all?”

Perhaps: “Never explain. Never excuse”, most especially when you have no explanation and you have no excuse?

@PerKurowski

Bank regulators violated the holy intergenerational social contract that Edmund Burke spoke about.

Sir, Philip Stephens writes: “Nostalgia has always had its place in politics. Respect for tradition is at the heart of Burkean conservatism. The deep irony about the now mythologised postwar decades, however, is that these were times when citizens looked unambiguously to the future.” “Nostalgia has stolen the future” July 27.

I am from 1950, and I do feel nostalgic whenever I think of all those savvy credit officers who were now substituted by equity minimization financial engineers.

When regulators, in order to make our banking system safe, ludicrously decided that what was perceived as risky was more dangerous to bank systems than what was perceived as safe, they distorted the allocation of bank credit in favor of the “safer” present so much that they de facto sacrificed that risk taking the “riskier” future needs. That is an egregious violation of that holy intergenerational social contract that Edmund Burke spoke about.

Those regulators are autocratic besserwisser populists who concoct their ideas, in a groupthink séance, in their Basel Committee mutual admiration club!

“Populists”? “We will safeguard your bank systems with our risk weighted capital requirements for banks” As if they knew what those risks were. Sir, can you think of something more populist than that?

@PerKurowski

Productivity, real salaries, employment rates, GDP should consider the increased consumption of distractions during work hours

Sir, Erik Brynjolfsson (and Andrew McAfee) writes: “If machine learning is already superhuman, why did we not see it in productivity statistics earlier? The answer is that its breakthroughs haven’t yet had time to deeply change how work gets done” “Machine learning will be the engine of global growth” July 27.

That is true, but we also need to realize that we have not done yet measured the effect of all the increased consumption of distractions during working hours.

In Bank of England’s “bankunderground" blog we recently read: “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

And on a recent visit to a major shop in the Washington area, thinking about it, I noticed that 8 out of the 11 attendants I saw were busy with some type of activity on their cellphones, and I seriously suspect they were not just checking inventories.

The impact of that on productivity, with less effective working time is being put into production, could be huge.

Also, going from for instance a 10% to a 50% distraction signifies de facto that full time or paid by the hour employee’s real salaries have increased fabulously.

And what about the real employment rate if we deduct the hours engaged in distractions? A statistical nightmare? Will we ever be able to compare apples with apples again?

And how should all these working hours consumed with distractions be considered in the GDP figures?

@PerKurowski

More important than giving millenials affordable housing, is to help them afford houses. C'est pas la même chose.

Sarah O’Connor writes, “Home ownership rates for young people have been declining for decades as house prices have detached from incomes.” “It’s time for millennials to fight for our rights” July 25.

Not really so! It is the price of homes that have become detached from the price of houses, as these have turned into investment havens.

Access to credit in preferential terms (like generating for the banks low capital requirements) and the support O’Connor mentions of “Bank of England [with low] interest rates and quantitative easing [tried] to shore up the economy, in part by propping up house prices” has made houses “safe” investments in a turbulent world.

When O’Connor mentions, “Loosening credit standards to help more millennials buy homes would be one method” my answer would be in the form of the following riddle:

How much easy financing has now to be provided to house buyers, only in order to finance the easy finance provided all house buyers previously? 

O’ Connor recommends “It would be better to build more houses in areas of high demand, including more social housing” and to “take measures to boost productivity so incomes rise”.

The first is indeed a sensible recommendation, for all times, but the second requires among other to stop favoring with the risk weighted capital requirements for banks the access of credit for the safer present (consumption - houses) which means de facto disfavoring that of the “riskier” future (production - entrepreneurs).

Let me be clear much more important than helping to give the young access to affordable housing, is to help them to afford houses; which of course c'est pas la même chose.

What I most miss though in O’Connor’s article is a reference to a Universal Basic Income. If the society is not able to generate decent and worthy unemployments, then increasing social conflicts will prove to be the greatest menace to the millennials (and to us oldies too)

@PerKurowski

What if there had been a plumber and a nurse in the Basel Committee for Banking Supervision? Would the 2007-08 crisis have happened?

Sir, I refer to Andy Haldane’s “Diversity versus merit is a false trade-off for recruiters” July 23.

After just a couple of months as an Executive Director of the World Bank, I told my colleagues that since most of us seemed to have quite similar backgrounds (although I came from the private sector), if by lottery we dismissed two of us, and instead appointed a plumber and a nurse, we would have a better and much wiser Board. That of course as long as the plumber and the nurse had sufficient character to opine and ask, and not be silenced by any technocratic mumbo jumbo. 

For example what if when the Basel Committee for Basel II in 2004 set their standardized risk weights for the AAA rated at 20% and for the below BB- at 150%, a plumber or a nurse had been present to ask the following three questions:

1. Has that credit risk not already been very much considered by the banker when deciding on the size of their exposures and the risk premiums they need to charge?

2. My daddy always told me of that banker that lends you the umbrella when the sun shines and wants it back when it looks like it might rain. So, therefore, is it not that what's perceived as safe, is what could create those really large exposures that could turn out really dangerous, if at the end that "safe" ends up being risky?

3. And is credit risk all there is about banking? What if that below BB- rated has a plan on what to do with a credit that could mean a lot for the world, if it by chance turns out right? Are you with these risk weights also not sort of implying that the AAA rated is more worthy of credit?"

Those very simple questions could have changed the course of history as the banks would not have ended up with some especially large exposures to what was perceived (houses) decreed (sovereigns) or concocted (AAA rated securities) as safe, against especially little capital (equity), dooming the world to an especially serious crisis.

Sir, how do we get some nurses and plumbers, meaning real diversification, not just gender or race diversification, into the Bank of England and the Basel Committee? These mutual admiration club types of institutions, with their groupthink séances, urgently need it 

https://teawithft.blogspot.com/2004/11/basel-is-just-mutual-admiration-club.html

https://subprimeregulations.blogspot.com/2018/05/if-only-these-four-simple-questions-had.html

@PerKurowski

If only the Basel Committee of Banking Supervision ‘Swallowed the brave pill’

Sir, I refer to Emma Jacobs "‘Swallow the brave pill,’ advises the tech executive turned entrepreneur" July 23

Currently regulators, by means of lower capital requirements, give banks incentives to build up large exposures on what is perceived, decreed or concocted as safe, like house financing, sovereigns like Greece and AAA rated securities. That is like feeding our banks carbs only, something which makes our bank system obese.

As a result those perceived as risky, like SMEs and entrepreneurs, and who are so important for the future of the economy, are also kept on an anorexic credit diet. 

That is all because regulators, even if banks with size of exposure and risk premiums already clear credit risk, are, quite infantile I would say, more concerned with the risks perceived ex ante than with what could happen ex post. Had they not been so, they would have long time ago realized that what puts our bank system in danger of major crisis, is never what is perceived ex ante as risky, but always what has been wrongly perceived as safe.

Wouldn’t it be nice Thomas Davies helped those regulators to “swallow a brave pill” in order to get over their affliction that so much hurts us? Then our bank system would be safer and our economies stronger.

@PerKurowski

To tell us “What really went wrong in the 2008 financial crisis” might require more distance to the events

Martin Wolf reviewing Adam Tooze’ “Crashed: How a Decade of Financial Crisis Changed the World” refers to the author’s question of “How do huge risks build up that are little understood and barely controllable?” “What really went wrong in the 2008 financial crisis?” July 18.

May I suggests as one cause, the nonsensical ideas that can be developed through incestuous groupthink in mutual admiration clubs of great importance, such as bank regulators gathering around with their colleagues of the central banks in the Basel Committee for Banking Supervision.

Wolf writes: “The crisis marked the end of the dominant consensus in favour of economic and financial liberalisation” 

Not so! The end in “favour of economic and financial liberalisation” happened much earlier when the regulating besserwissers decided they knew enough about making our bank systems safer, so as to allow themselves to distort the allocation of bank credit.

In 1988, the regulators, with the Basel Accord, Basel I, surprisingly, with none or very few questioning them, decided that what’s perceived as risky was more dangerous to our bank system than what’s perceived as safe, and proceeded to apply such nonsense with their risk weighted capital requirements for banks. More risk, more capital – less risk, less capital. 

That meant that banks could then leverage more their regulatory capital (equity) with “the safe” than with “the risky”; which translated into banks earning higher expected risk-adjusted returns on equity with “the safe” than with “the risky”. That would of course from thereon distort the allocation of bank credit more than usual in favor of the safe and in disfavor of “the risky”.

That of course ignored the fact that what is perceived as risky has historically proven much less dangerous to the bank system than that which is perceived as safe. 

Basel I, which already included much fiction, like assigning a 0% risk weight to sovereigns and 100% to citizens, was bad enough but then, in 2004, with Basel II, the regulators really outdid themselves allowing for instance banks to leverage 62.5 times their capital with assets that had an AAA to AA rating, issued by human fallible rating agencies was present.

We have already paid dearly for that stupidity, as can be evidenced by the fact that absolutely all assets that detonated the 2007/08 crisis had in common generating especially low capital requirements for banks, because these were perceived (houses), decreed (Greece) or concocted (AAA rated securities) as safe.

I have ordered it but of course I have not read Adam Tozze’s book yet. When I do I will find out if it makes any reference to this. If not, I might just have to wait for other historians who are more distant from the events.

@PerKurowski

When huge mistakes that hurt all of us are made, but no one is even publicly ashamed for these, what does that hold for our future?

Sir, John Authers writes about “The power unwittingly vested in ratings agencies. Regulations steered fund managers into credits with a certain minimum quality. Banks knew the capital they had to hold as a buffer depended on the rating the agency gave credits they held. The result was fund managers left judgment on credit quality to the agencies, while trying to bamboozle agencies into granting higher ratings than many securities deserved.” “Consultants’ claims and the evasion of responsibility” July 20.

“Unwittingly”? Meaning …without being aware; unintentionally? 

No! John Authers should allow the regulators to get away with that!

One needed not to be an expert on bank regulations to know that assigning so much power into the credit rating agencies was (is) simply wrong.

A letter I wrote to the Financial Times that was published in January 2003, stated: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”

And as an Executive Director of the World Bank, in a workshop for regulators who in May 2003 were discussing Basel II, I opined: “I simply cannot understand how a world that preaches the value of the invisible hand of millions of market agents can then go out and delegate so much regulatory power to a limited number of human and very fallible credit-rating agencies. This sure must be setting us up for the mother of all systemic errors.”

And in a formal statement at the Executive Board of the World Bank in March 2003 I prayed: “The sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies will introduce serious and fatal systemic risks into the world, is by having an entity like the World Bank stand up to them”.

So unwittingly it was not! And, really, if it was, then the more reasons to get rid of all those regulators fast.

Authers writes: “The problem is that when nobody takes responsibility, bad decisions can flourish”. Indeed, it is seriously critical for all of us that those who make serious mistakes are held accountable for it. 

So let me ask Sir: How many regulators have been fired or at least been publicly ashamed for this issue of the excessive importance to credit ratings, or for that matter for the much larger and serious issue of the utterly faulty risk weighted capital requirements for banks? Not a single one?

Could that partly be because you Sir, and too many of your colleagues, for whatever reasons of your own, have treated these regulators with the softest of the soft kid gloves?

Sir, as far as I know, you have not even been able to ask the regulators why they think that what is perceived as risky is more dangerous to our bank system than what is perceived safe.

Could it be because “Without fear and without favors” does not want or dare to hear the answer, or ask friends that question?

@PerKurowski

Don’t help bank regulators get away from being held accountable for their mistakes by politicizing the issue.

Sir, Gillian Tett commenting on Ben Bernanke, Henry Paulson and Timothy Geithner comments on the 10-year anniversary of the Lehman Brothers collapse writes:“Critics on the right complain that markets have been hopelessly distorted by government meddling” “European banks still have post-crisis repairs to do” July 20.

Frankly, you do not have to be from “the right” to “complain that markets have been hopelessly distorted by government meddling”

In 1988 bank regulators, based the risk weighted capital requirements for banks they were introducing on the nonsense that what was perceived as risky was more dangerous to our bank system than what was perceived as safe. With that they dangerously distorted the allocation of credit to the economy… and caused the crisis.

Would the Lehman Brothers have suffered the same collapse had not the SEC authorized it in 2004 to follow Basel II rules, and it could therefore (just like the European banks) leverage 62.5 times with securities backed with subprime mortgages, if these counted with an AAA to AA rating issued by human fallible credit rating agencies. Of course no!

But here we are a decade later and this major flaw of current bank regulations is not even discussed. What especially excessive exposures to something perceived decreed or concocted as safe are banks in Europe, America and elsewhere building up only because of especially low capital requirements, and which will guarantee, sooner or later, especially large crises? That should be the concern.

But, come to think of it, it could be that Ben Bernanke, Henry Paulson, Timothy Geithner and Gillian Tett, still believe in the story the Basel Committee told them, perhaps because they want so much to believe that a fairy could make banks safe and still be able to serve the economy. 

@PerKurowski

Where would America be today had not bank regulators distorted credit and central bankers kicked the crisis can forward?

Martin Wolf, expressing concerns we all deeply share asks, “Who lost “our” America?” and he answers: “The American elite, especially the Republican elite… They sowed the wind; the world is reaping the whirlwind. “How we lost America to greed and envy” July 16.

I respectfully (nowadays not too much so) absolutely disagree. That because supposedly independent technocrats generated the two following events:

First, in 1988 regulators with their so sweet sounding risk weighted capital requirements, promised the world a safer bank system, but then proceeded to design these around the loony notion that what was perceived as risky was more dangerous than what was perceived as safe. That distorted the allocation of bank credits in favor of the "safer" present and against the "riskier" future. That must have stopped much of any ordinary social and economic mobility.

Then in 2007/08, instead of allowing the crisis to do its natural clean up, central bankers, starting with the Fed but soon to be eagerly followed by ECB and other central banks, just kicked the can forward, favoring sovereigns and existing assets. Just as an example, with their repurchase of the failed securities backed with mortgages to the subprime sector, they saved the asses of many investors and banks (many European) while very little of that sacrifice flowed back to those who, in the process, had been saddled with hard to serve mortgages.

Martin Wolf, and you too Sir, would benefit immensely in trying to imagine how the world would be looking now, without that unelected and inept technocratic interference! What had specifically Republicans, or Democrats, to do with that interference?

As I see it if that had not have happened Trump would not even have been thinking of running as a candidate.

PS. An aide memoire on some of the mistakes with the risk weighted capital requirements.

@PerKurowski

For some, Lloyd Blankfein will be not kindly remembered and one of those who financed Venezuela’s Nicolas Maduro

Sir, Robert Armstrong, Laura Noonan and Arash Massoudi write that “Mr Blankfein may be remembered as the last leader of a Goldman Sachs that ruled Wall Street and the first leader of a sedate provider of financial services” “Blankfein’s legacy still up for grabs at Goldman” July 17.

Many, or at least some of us Venezuelans, will with fury remember Goldman Sachs’ Lloyd Blankfein, as one that helped finance a regime that publicly and notoriously violates human rights.

I just wonder if the Britain of Financial Times had had a regime like that of Nicolas Maduro, what is it would be saying of the legacy of someone who had helped to finance it? “Doing God’s work”? Well definitely not my God’s Sir.

Or is it too political incorrect for the elites to hold one like Lloyd Blankfein accountable for his doings? If so, what truly poor elites the world has to count on.

@PerKurowski

For transparency, all candidates to chair ECB’s Single Supervisory Mechanism, should publicly answer one question.

Sir, I refer to Claire Jones and Rachel Sanderson reporting on the selection by the European Central Bank, of the person to substitute for Danièle Nouy as the chair of the Single Supervisory Mechanism. “ECB banking watchdog seeks new chief” July 17.

A major turning point for our Western world liberal order, in truth for our whole civilization, was when regulators, surprisingly, 1988, with no one questioning them, decided that what is perceived as risky is more dangerous to our bank system than what is perceived as safe, and proceeded to apply such nonsense with their risk weighted capital requirements for banks.

We have already paid dearly for their stupidity, which excessively boosted bank exposures to AAA rated securities, house mortgages and sovereigns (like Greece), and has made it harder for SMEs and entrepreneurs to access bank credit.

Therefore, in the name of that transparency we all deserve, which of course includes all at the Financial Times, all candidates to chair ECB’s Single Supervisory Mechanism should give their public and reasoned answer to the following question: 

What is more dangerous to our bank system, that which is perceived as risky, or that which is perceived as safe?

Will those involved in the selection process, and who might clearly have a vested interest in it remaining a question that shall not be asked, dare to ask it?

Here an aide memoire on the major mistakes of the RWCR

@PerKurowski

If you want accurate data on bank risks, you have to start by removing all the incentives for banks to misrepresent their data

Charles Taylor, a former chair of the supervision and implementation group of the Basel Committee on Banking Supervision writes: “big banks should always be able to paint an up-to-date, comprehensive picture of the risks they face… [But] management often seem not to care” “Banks’ approach to risk data is deeply inadequate” July 16.

Sir, if a big bank reported an increase risk in a category of assets, what would the regulators most likely response be? To “either restrict banks’ activities or boost their capital requirements”… even Charles Taylor dixit.

While, especially the large banks are more in the business of obtaining their highest risk adjusted returns on equity, not by traditional lending but by minimizing capital requirements, that will simply not happen. And to believe it could, is just further proof of how naïve the current bank regulators are.

Taylor writes: “One of the lessons of the 2008 financial crisis was that watchdogs need timely information for the system as a whole.” Nonsense! The prime lesson from that crisis is that the watchdogs have no idea about what they’re up to. Imagine, just for a starter, their risk weighted capital requirements are based on such crazy theorem that holds that what is perceived as risky is more dangerous to the bank system than what is perceived as safe.

Sir, just as an example, we are talking of a “watchdog” that thought it was ok for banks to leverage 62.5 times if only a human fallible credit rating agency had assigned an assets and AAA to AA rating.

The “watchdog” seems to invest a lot of hope in “the Legal Entity Identifier [will] make it easier to track specific buyers and sellers” Ok, but what are they supposed to do with that? Make the risk weighted capital requirements for banks portfolio variant? Good luck with that! But please remember, bankers can screw up the portfolio of their bank, while regulators could do the same with all banks, simultaneously.

Taylor writes: “By 2017, only three of the 30 “global systemically important banks” were up to snuff” And so the question that has t be made is, could those three not be the most able to game it all? Like Volkswagen gamed carbon emission tests?

What to do? Although the road there is full of dangers, the final destination must be one single capital requirement (10%-15%) against all assets. No more distortions! 

Sir, again, I am amazed on how FT can, at this late stage of the game, still buy in so much into what the so utterly inept Basel Committee regulators try to sell. 

@PerKurowski

There are those interested in some economic data being classified as “Data that shall not be observed”

Sir, Tim Harford, in view of the continuously increasing availability of data, discusses some tools that could be used by the science of economics. “Data impel economists to leave their armchairs” July 14.

Not a second too late. I have for years wondered in what “laboratory full of bubbling flasks, flashing consoles and glowing orbs” regulators could have come up with their theorem that states that what is ex ante perceived as risky, is more dangerous to bank systems than what is perceived as safe. With that under their arms they went out and imposed their risk weighted capital requirements on banks.

If some real data on that would now appear in a research paper, like on that which caused the 2007-08 crisis, what will all those who have with their silence reinforced that crazy theorem do? Act as any neo-inquisitor, and just burn that paper up?

PS. Here an aide memoire on that regulatory stupidity

@PerKurowski

When it comes to recklessness, the whizz-kids are small fry when compared to current bank regulators

Sir, Gillian Tett, referring to “the 2008 financial crisis writes: “Regulators were largely toothless because the whizz kids were creating financial instruments that straddled national borders, regulatory silos and outdated laws” “Cambridge Analytica scandal echoes the financial crisis” July 13.

Hold it there! If the regulators were “toothless”, what on earth were they doing regulating in the first place?

And, really, how much damage could reckless whizz kids have caused, if regulators had not, for instance allowed banks to leverage their capital with securities backed with mortgages to the subprime sector, 62.5 times, only because a human fallible credit rating agency had assigned that instrument an AAA to AA rating?

And what whizz kids have ever been involved with something as reckless as when regulators assigned a risk weight of 0% to sovereigns like Greece?

If we take this all to the issue of misuse of data, what are we to say about regulators who seem to keep a low profile on the fact that whatever data Cambridge Analytica laid there hands on, that was nothing when compared to the so much more extensive data social media, like Facebook, already possess. Could these regulators, in a Basel Committee for Data Supervision, really be crafting adequate policy responses that will not have serious “unexpected” consequences?

What if that data had now to be shared with governments, would that not make any autocrats’ “Big-Brother is Watching You” wet dreams come true?

@PerKurowski

The UK needs its banks to get rid of equity minimizing financial engineers and call back savvy loan officers (perhaps some like George Banks)

Sir, Martin Wolf writes he now “rather suspect”, that “the BoE’s views on risk weights might be leading to an economically unproductive focus on property lending”. “Labour’s productivity policy is a work in progress” July 13.

Banks are allowed to leverage more with what’s perceived, decreed or concocted as safe, like with mortgages, loans to sovereigns and AAA rated securities, than with what’s perceived as risky, like with loans to small and medium enterprises and to entrepreneurs.

That means clearly that banks are allowed to earn higher expected risk-adjusted returns on equity with “the safe” than with “the risky”; without any consideration given to the purpose for which the financing is to be used. In essence, regulators have decreed that “the safe” are worthier borrowers than “the risky”.

And of course, since risk taking is the oxygen of any development that is doomed to negatively affect the productivity of the economy.

Sir, I’ve written hundreds of letters to Mr. Wolf about “imprudent risk-aversion” for over more than a decade, and so of course I am glad he has reached the stage of “rather suspecting” all this is true. 

Wolf here refers to a report prepared for the Labour party by Graham Turner of GFC Economics that as a solution mentions, “the establishment of a “Strategic Investment Board” to deliver the government’s industrial strategy, use of the Royal Bank of Scotland to deliver lending to small and medium businesses and creation of an “Applied Sciences Investment Board” to deliver public sector financing of research and development.”

How can I convince Wolf that long before any statist Hugo Chavez like ideas that he still considers “half-baked” are tried out, we need to get rid of the distortions produced by the risk-weighted capital requirements for banks.

As Martin Wolf mentions, it could start with someone “wondering why securing financial stability is the only official aim for bank lending”; perhaps adding for emphasis the why on earth, in all bank regulations, there is not a single word of the purpose for banks beyond that of being safe mattresses into which to stash away cash.

But we could also question for instance BoE’s Mark Carney and Andy Haldane, on why they believe that what is made innocous by being perceived as risky, is more dangerous to the bank system than what is perceived as safe.

PS. On “the City of London being a global entrepot with little interest in promoting productive investment in the UK” I can only remind you and Wolf that could precisely be one of the reasons for why George Banks decided to quit banking and go fly kites instead 

@PerKurowski

What do we all have left to counter any major new round of debt-failures with?

Sir, Jonathan Wheatley reports that according to the Institute of International Finance “Total debt owed by households, governments, and financial and non-financial corporations were $247.2 tn at the end of March 2018 and, relative to gross domestic product, exceeded 318 per cent” “EM exposure Surging debt puts pressure on global financial system” July 12.

Emerging markets? What about all of us?

Households count on their income and worth of assets, basically houses, to pay back their debt… and their increased debt, anticipated demand, means they cannot help each other as much as they used to.

Non-financial corporates, which have become much more leveraged, count on business remaining healthy, though indebted households and governments will find it harder to keep up the demand they need.

Governments depend mostly on tax revenues, and these will depend on how it goes for households and non-financial corporations.

Financial corporates depend on deriving some profitability intermediating for the other three sectors, and on In God We Trust 

Looking at the harrowing figures three questions come to my mind.

The first, where would we all be if we in 2007-2008 had gone for the hard landing I suggested in 2006, instead of pushing the crisis can forward?

The second, where would our banks and all our debts be if banks had needed to hold for instance 10% in capital against all assets?

The third, WTF do we all have left to counter any major new round of debt-failures with?

@PerKurowski

High bankers bonuses results from having to remunerate very little shareholders’ capital

Lex writes: “More than 700 high earners last year in Deutsche Bank were paid a weighted average of €1.9m a year”. July 11.

What would they be paid if the bank needed to hold 10% in capital against all assets? The equity minimization is the prime driver of high bonuses. 

@PerKurowski

Martin Wolf, ask the Greeks: Who is more dangerous, Trump with his trade tariffs, or​ ​bank regulators with their risk-weights?

Sir, Martin Wolf lashes out against the President of the United States’ “administration’s trade actions and announced [trade] intentions defining him as an “ignoramus” “Trump creates chaos with a global trade war” July 11.

I just know central bankers and bank regulators should know more about their specialized line of activity, than what a real estate developer should know about trade policy. And so, when it comes down to the title of world-class ignoramus, in my mind that one should clearly go to those who came up with the senseless idea of the risk weighted capital requirements for banks.

Dare to explain to a Greek that European technocrats assigned a 0% risk weight to their government, and that this was what led bankers into lending to it way over its capacity to use the loans. And then ask the Greek who is more dangerous, Donald Trump with his trade war, or bank regulators with their war, with subsidies and tariffs, on the allocation of bank credit?

Yes, Trump poses a threat to significant part of world trade, but the besserwisser in the Basel Committee have dangerously distorted most of the allocation of bank credit in the world.

PS. Here is a letter I wrote and that Washington Post published today and which has exactly to to with this theme

@PerKurowski

When analyzing labor markets, do not ignore the time being wasted/used consuming distractions.

Sir, (as usual) I read with much interest Sarah O’Connor’s article on “labour shortages being reported gloomily all over the developed world” “Labour scarcity helps heal workers’ deep financial scars” July 11.

I think she forgot to include in her analysis the fact that more and more time is used during working hours in distractions. On a recent visit to a major shop in the Washington area, 8 out of the 11 attendances I saw were busy with some type of activity on their i-phones, and I seriously suspect they were not just checking inventories.

Less hours effectively worked, should translate not only in labor shortages but also into higher real salaries. And I also frequently ask myself what would our economic data be telling if treated the distractions as consumption. Could productivity have been increasing fabulously without us noticing it?

@PerKurowski

The Basel Committee stupidly made banks substitute savvy loan officers with equity minimizing financial engineers

Sir, John Plender, reviewing Philip Augar’s “The Bank That Lived a Little” writes: Not so long ago banking was a relatively simple business whose main focus was on deposit-taking and lending. Then in the 1980s everything changed as a powerful tide of deregulation swept through the industry… courtesy of Ronald Reagan and Margaret Thatcher”, “Head rush”, July 7.

Was it “deregulation” or plain missregulation? The main change that was introduced in banking, in 1988, with the Basel Accord, was the risk weighted capital requirements for banks. 

That meant that from there on, the risk-adjusted returns on bank equity were not to be maximized by savvy loan officers, but by equity minimizing financial engineers.

And clearly “increasing amounts of risk in relation to dwindling cushions of capital” allowed the bonuses of bankers to be so much higher.

Has banking “turned into an ethics-free zone”? Yes, but blame the regulators for much of that. Now, 30 years later, I would think there is no room to put the blame on Ronald Reagan or Margaret Thatcher. 

Frankly, since FT has not dared to ask regulators why banks have to hold more capital against what is dangerous perceived as safe than against what is made innocous by being perceived as risky, as I see it, FT is so much more responsible for all this mess.

@PerKurowski

Jesus said, “Put out in the deep”. Regulators tell banks “Fish in shallow waters… preferably from the shore”

Sir, Martin Wolf writes, “Mr Trump’s narrowly transactional approach, driven by ignorance and resentment, risks disaster” “Donald Trump’s war on the liberal world order” July 3.

I agree there is room for serious concern with respect to what President Trump might do but, for the time being, for the umpteenth time, much more than what he might be sabotaging the liberal world order, bank regulators already did.

This Sunday, in the Swedish church in New York, they read us how Jesus invited the Apostles to "put out into the deep" for a catch: "Duc in altum" (Lk 5:4). "When they had done this, they caught a great number of fish" (Lk 5:6).

With their risk weighted capital requirements for banks, more perceived risk, more capital – less perceived risk, less capital, the regulators de facto told our banks to fish in shallow waters… preferably from the shore.

To assign a 20% risk weight to a corporation rated AAA to AA, and 100% to an unrated corporation 100%, and "generously" permitting the possibility of risk weighing small entrepreneurs with only 75%, has absolutely nothing to do with a liberal world order.

Moreover to assign a 0% risk weight to sovereigns and one of 100% to citizens, reads just like a communist world order.

“Armoured by ignorance”? Indeed, those regulations guarantee excessive exposures to what is especially dangerous as it is perceived, decreed or concocted as safe; against especially little capital… in other words it dooms our banks to especially severe crises.

Good job Basel Committee!

@PerKurowski

Those who sell us a universal basic income as a total solution, could just be wanting for it to fail

Sir, I refer to Tim Harford’s “Basic income or basic jobs?” June 29. The theme has become more fashionable because of robots and artificial intelligence, but the lack of jobs is not a new concern.

In 2003 in an Op-ed I wrote: “There’s a hint of all coming to a standstill in the theory about how globalization will optimize the world economy, by ensuring that merchandise will always be produced at the lowest marginal cost. What good does it do us to have products where the cost of the labor component gets smaller by the minute, if workers can’t buy the very products they produce?”

I ended that in jest with “Friends, let’s give one another jobs, scratching each other’s backs—paying each other good salaries of course.”

In 2012, while I was still not censored in Venezuela, in another Op-Ed titled “We need decent and worthy unemployments” I began it with: “What politician does not speak up for the need to create decent and well paid jobs for young people? But, if that's not possible, and the economy is not able to deliver that on its own ... What on earth do we do?”

In search of the answer I there asked: “Which is better: educating for a source of employment likely to be absent and therefore only create frustration, or educate for unemployment, and suddenly perhaps reaching, when on that route, the pleasant surprise of some jobs?”

Therefore Sir, in the choice between a basic income and a basic job, I clearly go for the first. The waste that could result, especially in uncertain times like these to develop guaranteed jobs, would surely be too big.

But that does not mean I consider that a Universal Basic Income either can or should be designed to satisfy all needs. For the time being it should just be a tool to help people get out of bed and reach up to whatever job opportunities might be around.

How much? Start with little. For instance, if there are pressures to increase the minimum wage $3 per hour then, for a fulltime 160 hour per month that signify $480. So why not start a UBI at that level and let time tell us where it can go? The additional demand that could be generated will, at existing salary levels, generate many jobs too.

What I most fret though are the redistribution profiteers. Concerned with seeing the value of their franchise erode, they might sell UBI’s promises excessively, both in amounts and purpose, so as to make the whole idea of a social dividend collapse, in order for them to get back in the saddle again. It behooves us all to stop them.

@PerKurowski

The financial crisis can was just kicked forward. At any moment it will roll back on us, with vengeance.

Sir, Raghuram Rajan, though indicating problems, writes: “The world economy has finally managed to recover from the financial crisis” “Bond markets send signals of a looming recession” June 29.

Sir, on the surface the signs of a recovery are there but, under the surface there are huge build-ups of asset values, shares and house prices, and of personal, public and corporate debt, that herald difficult times.

In August 2006, when trouble was already in the air, you published my letter titled “The long term benefits of a hard landing”. Clearly nothing of what I there argued was considered.

With QEs, Tarps, Asset Purchase programs, fiscal deficits, low interest rates and the keeping of much of the insane low capital requirements for banks, the crisis can was just pushed forward. 

Add to that Eurozone, China, Brexit, robots grabbing jobs, trade wars, migrant issues and so many unresolved problems, and one can perhaps begin to understand a not to be named reason for how so many want to legalize the use of marihuana.

Sir, again, much of the current mess is directly produced by the frantic efforts of regulators and central bankers to hide their responsibility in causing the 2007-08 crisis and ensuing hardships.

For God’s sake! In Greece they are hauling in front of courts a statistician for telling the truth, while those that with their absurd and irresponsible 0% risk weighing of that nation doomed it to excessive public debt, are free to roam and lecture us about good economics. 

@PerKurowski

If regulators, or even FT, do not questions the 0% risk weight of sovereigns, why should ordinary citizens care about public sector deficits?

Sir, Janan Ganesh writes“Americans no longer care about deficits, or at least no longer care enough. Their concern about them has waned since the mid-nineties” "How America learnt to love the budget deficit” June 28.

In 1988, with the Basel Accord, regulators introduced risk weighted capital requirements for banks and for that purpose assign risk weights to sovereigns of 0%. And European central banks assigned such 0% even to Greece, and Greece drowned in public debt, and yet no one, not even FT questions that 0% risk weight.

So Sir, why should ordinary Americans care about fiscal deficits when supposedly these can be financed with a 0% risk… because the government controls the money-printing machine?

Ganesh should not worry solely about America, with these statist bank regulators we are all being set up for a horrible crash. 

@PerKurowski

Odiously inept bank regulators consider ex ante that the entrepreneurs are less worthy of credit than house buyers

Sir, Daniel Davies discussing the work-outs of small business failures seemingly based on what some bad apples did, writes that “unpleasant realities [are swept] into grubby corners so that the banking system can look clean and efficient” “The finance industry’s Achilles heel”, June 27.

Sincerely, as one who has been proudly involved as a consultant in many workouts of all types for more than two decades in Venezuela, before the failure of that nation, I must say that I do not identify much with what Davies writes. For instance what’s wrong with that when real estate loans are renegotiated there is often a “change of valuation basis”? It would surely be more of an Achilles heel for the finance industry, if its valuation of assets did not change with changing circumstances.

Davies wants us to “Consider what happens when an entrepreneur is classified as a “distressed borrower” rather than a “start-up founder”… at that point, the person has been put into a category in which their word is not as good as other people’s.” 

But classifying an entrepreneur ex post, quite naturally, as a distressed borrower, cannot be remotely as bad as when regulators, ex ante, by allowing banks to leverage more when financing “safe” houses than when financing “risky” entrepreneurs are, de facto, saying that the word of an entrepreneur is worth less than that of house buyers. 

If there has been any sweeping of unpleasant realities into grubby corners, that is the role the regulators, with their foolishly risk adverse risk weighted capital requirements, have played in putting bank crisis and economic stagnation on steroids. Had for instance any credit rating agency assigned a 0% risk to Greece and with that doomed that country to a tragic over indebtedness, it would probably be hauled in front of judge… but there are the regulators still regulating as if they had done nothing.

And Sir, you know I think FT has quite shamefully helped the regulators with much of that sweeping.

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

@PerKurowski

We need worthy and decent unemployments

Sir, I refer to Martin Wolf’s “Work in the age of intelligent machines” June 27.

In 2012 (while I was still not censored in Venezuela) I wrote an Op-Ed titled “We need worthy and decent unemployments”. In it I held “The power of a nation, and the productivity of its economy, which so far has depended primarily on the quality of its employees may, in the future, also depend on the quality of its unemployed, as a minimum in the sense of these not interrupting those working.”

That is the reason why I am absolutely sure our societies have to start urgently, even if from a very low level, to implement an unconditional universal basic income (UBI).

And referring also to Sarah O’Connor’s “Minimum wage laws still fall short for those on the bottom” June 27, let me point out that while minimum wages raises the bar for the creation of jobs, UBI is a stepping stool that allows you to reach up to the mostly low paying jobs of the gig economy. 

PS. You want to increase the minimum wage $2 per hour? Better pay $2x40x4 $320 in universal basic income to all.

@PerKurowski

Flags need also to be raised, when influential multilateral financial institutions help to blow up bubbles

Agustín Carstens, the general manager of the Bank for International Settlements writes: “A decade of unusually low interest rates and large-scale central bank asset purchases may have left many market participants unprepared, and contributed to a legacy of overblown balance sheets” “It is precisely when pressure starts to build that flags need to be raised” June 26.

Indeed, but to that we should add the presence of extraordinary low capital requirements for banks when lending to what’s perceived as safe, like to house buyers and sovereigns. These have helped to explode the exposure to this type of loans, as well as distort the signals sent to the markets, something that of course has also helped to inject a lot of liquidity. 

Carstens also opines: “At the BIS, we have come to appreciate how unrewarding it can be to flag risks when markets are running hot. Yet that is precisely when risks tend to be highest.” 

Indeed, that is the same difficulty all influential institutions like the IMF face since, whenever they flag a risk, they could be accused for helping to set off a crisis. But now they all have themselves to blame for making the flagging problem so much worse. By assigning risk-many sovereigns a risk weight of 0% they painted themselves into a corner. When you know that risk weight is absolutely wrong, how do you go about to change it without scaring the shit out of the markets?

@PerKurowski

Citigroup’s Chuck Prince said: “As long as the music is playing, you’ve got to get up and dance”, but bank regulators insist on playing the same 30 years old song.

Sir, Andrew Hill worries about how many of today’s banker class remember it, let alone worry, about the complacency expressed in Chuck Prince’s “As long as the music is playing, you’ve got to get up and dance. “James Gorman, chief executive of Morgan Stanley “Amnesia dooms bankers to repeat their mistakes” June 24.

Hill hopes Gorman “is experienced enough to have detected the echoes of 2007 in the current soundtrack of rising share prices and lowering regulatory burdens… and that he teaches “more of his younger, fresher-faced staff to recognize the tune and know when to bow politely and leave the dance floor.

As for me I would much rather prefer the regulators stopped playing that very same old song of the “risk weighted capital requirements for banks”, composed in 1988 by the Basel Accord, and otherwise known as “You earn higher returns on the safe than on the risky”. That song drove bankers into an intense maniac polka, in pursuit of the very high expected risk adjusted returns offered on what was perceived (houses), decreed (Greece 0% risk), or concocted (AAA rated securities) as safe.

PS. Hill refers to John Kenneth Galbraith’s The Great Crash 1929 account of the willful errors and self-interested speculation of the great investment banks. But Galbraith also wrote “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.” Money: Whence it came, where it went” (1975)

@PerKurowski

Regulators gave banks great incentives to smoke around drum barrels marked “empty”, and to stay away from drums marked “full”.

Gillian Tett writes “before 2008 the big banks spent a great deal of time fretting about issues that seemed obviously risky — hedge funds or highly leveraged companies — but tended to ignore anything that seemed safe or boring, such as AAArated mortgage-backed securities” “What the Hopi culture teaches us about risk” June 23.

Sir, if you go to my TeaWithFT blog and click on Gillian Tett, you will find that over the years I must have written her at least 100 letters explaining that what is perceived as risky, drums marked “full”, is never as dangerous than what’s perceived as safe, drums named “empty”. 

But, if a 70 year old paper by US fire-safety inspector Benjamin Lee Whorf, based a lot on Hopi Native American culture, is more convincing to Ms. Tett than my arguments, so be it.

My real complaint though is that Ms. Tett only refers to what bankers did, and does not mention the fact that bank regulators, on top of it all, with their risk weighted capital requirements, allowed banks to smoke (leverage) much more around drums named “empty”, than around drums named “full”. 

So when Ms. Tett writes: “In theory, this danger has now receded: banks have been trained to take a more holistic view of risk and to question whether even AAA ratings are always safe”, let us not forget that with Basel II, regulators allowed bank to leverage a mindboggling 62.5 times if only an AAA to AA rating was present. Since that besserwisser regulatory mentality still prevails, and risk weighting derived incentives still exists, unfortunately I do not share the hope that dangers have receded. New dangerous “absolutely safe” always lurk around the corners.

And Sir, come on, we have European central bankers who told banks “You can smoke as much as you like around that 0% risk weighted drum named Greece”; and they have still not been made accountable for that… and, between you and I, you FT is not entirely without blame for that.

PS. The sad complement to this analysis is that what regulators decreed as drums marked “full”, and made banks stay away from, includes entrepreneurs and SMEs, something which must erode the dynamism of the economy. 

@PerKurowski

How can banks price risks correctly when regulators interfere and alter the payouts?

Sir, Gillian Tett writes: “If you peer into the weeds of global finance, you will see peculiarities sprouting all over the place… there is [a] pessimistic explanation: years of ultra-loose monetary policy have made investors so complacent that they are mis-pricing risk.” “Markets appear calm but are behaving abnormally” June 22.

Years of ultra-loose monetary policy, QEs or asset purchase program have indeed distorted the markets so there has to be much mis-pricing going on. But that’s not all.

The expected winnings (the dividends or payouts times the odds of winning) is exactly the same for all possible bets in a game of roulette. This is why roulette functions as a game. The credit markets with all the signals read and emitted, by all its many participants, givers and takers, continuously work towards equal payouts. And achieving these is what an efficient credit allocation is all about. 

But what if someone altered the payouts in roulette, like the regulators, with their risk-weighted capital requirements for banks did in the market of bank credit, how long would roulette survive as game?

Sir, just remember the 0% risk weight assigned by European central bankers to Greece. Those allowed banks immense leveraging and see such ROE payout possibilities that it went overboard lending to Greece; just in the same way Greece went overboard borrowing too much. 

And what about mispricing the risk of securities with a 20% risk weight in Basel II, which allowed banks to leverage 62.5 times only because some human fallible rating agencies had assigned these an AAA to AA rating? Frankly, is not the current bunch of bank regulators the mother of all mispricers ever?

So, to blame the investors, markets, banks for mispricing risks while blithely ignoring the regulatory (and other) distortions that exists is irresponsible; and could only be understood in terms of wanting to favour bank regulators… something which you hold in your motto you do not. 

Sir, let’s get rid of as many distortions as possible, so as to let investors, markets, and our banks stand a decent chance to do a good job allocating credit. The future of our grandchildren depends on it.

For a starter, and though the road there is full of difficulties, we must get back to one single capital requirement (8-15%) for banks, so that these can leverage the same against absolutely all assets.

@PerKurowski

Is the Eurozone intent on once again give Greece's government a much lower risk weight than that assigned to a Greek entreprenuer?

Sir, Jim Brunsden writes: “Eurozone finance ministers are poised to give Greece debt relief —The plan is to help convince investors that Greece is ready to return to markets when its bailout programme expires in August.” “Creditors set to reach agreement over Athens debt deal” June 21.

That sure does sounds scary if the “convincing of the investors” once again includes giving the Greek government, for the purpose of the capital requirements of banks, a lower risk weight than it merits. That would be sheer cruelty.

Let us never forget (though the statists have classified it as something that should not be named) that it was the insane 0% risk weight assigned to Greece by European central bankers that got that country into its so tragic difficulties.

In my opinion the Greeks (or at least Yanis Varoufakis) should have taken those central bankers to the European Court of Justice long time ago. Imagine what would have happened to a credit-rating agency had it assigned such 0% risk weight to Greece?

https://subprimeregulations.blogspot.com/2011/11/who-did-eurozone-in.html

@PerKurowski

Do we not need a Martin Act to crack down on regulators who dare regulate banks without having a clear idea about what they are doing?

Sir, Brooke Masters writes “global banks and other big financial services groups have lived in fear of an old New York state anti-fraud law. The Martin Act has been used to crack down on biased Wall Street research, insurance bid-rigging and “dark pools” said to mislead traders, among many things” “Loosening the law that haunts bankers puts us at risk” June 20.

Great! But why is there not anything similar when for instance European regulators and central bankers assign a 0% risk weight to Greece. Of course they must have known Greece was not worth it, no sovereign is, and yet they went ahead. And the final consequence of that have been horrible sufferings resulting from excessive public debt, but without the slightest indication of holding those responsible for it accountable.

Yes “The US system relies on fears of prosecution and giant fines to help keep banks and insurers honest”, but what do we have to keep technocrats from regulating when they obviously have no idea about what they are doing… like for instance when they think that what is ex ante perceived as risky poses ex post more dangers to our bank system than what is ex ante perceived as risky.

@PerKurowski

Way too little has been done in 20 years to counter the Eurozone losing its foreign exchange adjustment tool.

Sir, Martin Wolf writes: “Andreas Kluth wrote in Handelsblatt Global this month: ‘A common currency was supposed to unite Europeans. Instead, it increasingly divides them.’ He is right” “The Italian challenge to the eurozone” June 20. 

Of course he is!In 1998, on the eve of the Euro, in an Op-ed titled “Burning the bridges in Europe” I wrote: 

“The Dollar is backed by a solidly unified political entity, i.e. the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.

The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive. High unemployment will not be confronted with a devaluation of the currency which reduces the real value of salaries in an indirect manner, but rather with a direct and open reduction of salaries or with an increase of emigration to areas offering better possibilities.”

So clearly “All of this was predicted” Yes, but why has so little been done about it? Why have EU technocrats instead wasted their time on so many other minutiae?

What I did not foresee though, really because I had no idea of it, was that with the risk weighted capital requirements for banks, that which assigned a risk weight of 0% to sovereigns and 100% to citizens, fatal distortions in the allocation of bank credit were introduced, causing “high level of public debt” and making it all so much harder on the eurozone.

@PerKurowski

A major difficulty for EU is that what caused the last crisis, and attempts against its economic dynamism, shall not be named

Sir, Judy Dempsey writes that Merkel’s “conservative bloc would not buy into an agreement that would require Germany to spend more to bail out badly run economies” “Macron and Merkel will struggle to present a united front” June 19.

Have Merkel’s “conservative bloc” been told that their bank regulators assigned a risk weight of 0% to Greece and so that therefore Greece got way too much money?

Have Merkel’s “conservative bloc” been told that their regulators require banks to hold more capital against loans to German unrated entrepreneurs, than against loans to any EU sovereign?

Sir, I am sure that if central bankers and regulators were hauled in front of some really independent authority, and asked to comprehensibly explain so much of the crazy things their risk weighted capital requirements for banks entail, that would help clear the air and lead to much more constructive discussions in the EU about its future.

Who knows, perhaps such real discussions that would at long last hold some EU technocrats accountable, could even tempt a reversal of Brexit.

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

@PerKurowski