November 21, 2017

Jockeying for position to currently advise Venezuela on its debt restructuring could have serious legal, or at least reputational consequences

Sir, Robin Wigglesworth, with respect to Venezuela’s debt writes: “Any restructuring will be a Herculean task, given US sanctions” “Debt restructuring battle brews over Venezuela” November 21.

It is not only the US sanctions. Since many, or probably most Venezuelan consider those debt origination in odious or at least totally non-transparent credits we have not the faintest trust in that negotiators helping the government to restructure is helping us.

So any negotiator now would have blacklisted himself, for those restructuring negotiations that can only begin in earnest when the Maduro government is gone.

Also I cannot understand that, for instance one of the prime renegotiation advisors you mention like the “mysterious art-loving Mexican billionaire called David Martinez”, can be so naïve so as to believe that the threat of US sanction to Americans will not be extended to anyone substituting for Americans.

In summary you do not advise governments that are violating basic human rights without the possibility of facing very serious consequences for that. As a minimum they should be aware that many of us Venezuelan will, when we can, try to recoup any odious restructuring fees paid to them… and keep them away forever from Venezuela

Personally I am much in favor of the Venezuelan Supreme Court of Justice in exile, requested by the Venezuelan National Assembly, initiates the first stage of any debt restructuring, namely classifying all those debts in bona-fide, dubious or odious. 


If you allow banks to earn higher risk adjusted returns on equity on mortgage lending than when lending to entrepreneurs, bad things will sure ensue

Sir, Jonathan Eley writes: “in the UK…younger people especially are being priced out of the market while their parents and grandparents benefit from decades of above-inflation rises in home values. The ruling Conservatives, traditionally the party of home ownership, now finds itself shunned by millennial voters frustrated by spiralling housing costs” “Why Budget fix will not repair market” November 21.

And among the long list of factors that has distorted the market in favor of houses Eley includes: “Mortgage securitisation facilitated further growth, as did the Basel II reforms cutting the risk weights applied to real estate. This made mortgage lending less capital-intensive for banks.”

This Sir is one of the very few recognitions, by FT journalists, of the fact that risk weighting the capital requirements for banks distorts the allocation of bank credit.

Indeed, Basel I in 1988 assigned a risk weight of 50% to loans fully secured by mortgage on residential property that is rented or is (or is intended to be) occupied by the borrower, and Basel II reduced that to 35%. Both Basel I and II assigned a risk weight of 100% to loans to unrated SMEs or entrepreneurs.

But the real bottom line significance of “mortgage lending [being] less capital-intensive for banks”, is that banks when being allowed to leverage more with mortgages than with loans to SMEs and entrepreneurs, earn higher expected risk adjusted returns on equity with mortgages than with loans to SMEs and entrepreneurs, and will therefore finance houses much much more than SMEs and entrepreneurs, than what they would have done in the absence of this distortion.

As I have written to you in many occasion before, this “causes banks to finance the basements where the kids can live with their parents, but not the necessary job creation required for the kids to be able to become themselves parents in the future.”

And the day the young will look up from their IPhones, and understand what has happened, they could/should become very angry with those regulators that so brazenly violated that holy intergenerational social bond Edmund Burke wrote about.

I can almost hear many millennials some years down the road telling (yelling) their parents “You go down to the basement, it’s now our turn to live upstairs!”

Eley also quotes Greg Davies, a behavioural economist with: “People like houses as an investment because they are tangible. They feel they understand them far more than funds or shares or bonds.”

But the real measurement of the worth of any investment happens the moment you want to convert it into current purchase capacity. In this respect people should think about to whom they could sell their house in the future, at its current real prices.

PS. In June 2017 you published a letter by Chris Watling that refers exactly to this, “Blame Basel capital rules for the UK’s house price bonanza”.

What most surprises me is that regulators don’t even acknowledge they distort, much less discuss it… and that the Financial Times refuses to call the regulators out on this… especially since all that distortion is for no stability purpose at all, much the contrary.

It is clear that no matter its motto of “Without fear and without favor”, FT does not have what it takes to for instance ask Mark Carney of BoE and FSB, to explain the reasoning behind Basel II’s meager risk weight of only 20% to the so dangerous AAA rated and its whopping 150% to the so innocous below BB- rated.


November 20, 2017

Anyone jumping ship on the delusion that risk-weighted capital requirements make banks safer and economies better, has a better chance to survive

Sir, Wolfgang Münchau discusses many delusions held by both Brexiters and Remainers, and argues correctly: “To make the best of Brexit, the UK will need to embrace a more entrepreneurial and innovative economy” “An old-fashioned economy heads towards a downfall” November 20.

But when he writes: “For Brexit to succeed the UK will end up becoming more — dare I say it — European”, I disagree.

That because when Münchau holds that Britain “has an entrepreneurial culture to build on”, that is unfortunately no longer the case. No country with an active “entrepreneurial culture” would ever have allowed the de facto anti entrepreneurial risk-weighted capital requirements for banks.

Sir, if I had to choose between a Britain that did not hold back its risk takers, and one that was comfortably living off a larger European market then, if thinking about my grandchildren, I would without any doubt prefer the first one.

As I see it the European Union, governed by unelected risk adverse technocrats, who like old soviet central planners paint from their desks roads to the future, is doomed to fail… and that no matter how much “Universities… work more closely with industry”. In that Europe, the faster you jump ships the better.

If I were a British citizen I would instead be calling out to Europe proposing a different EU. Who knows what answer I would get from Poland, Italy, Spain, Portugal and others? Why for instance should they stay with those who most benefit from a Euro made weaker by the weaker?

PS. For those who do not know me in the context of any European Union and Euro debate, perhaps the following Op-Ed could help as an introduction. 


November 17, 2017

The safest route for UK might be to take to the seas in a leaky boat, abandoning a safe haven that is becoming dangerously overpopulated.

Sir, Martin Wolf writes: “A significant generational divide has opened up. Those aged 22-39 experienced a 10 per cent fall in real earnings between 2007 and 2017. They were also particularly hard hit by the jump in average house prices from 3.6 times annual average earnings 20 years ago to 7.6 times today. Not surprisingly, the proportion of 25-34 year olds taking out a mortgage has fallen sharply, from 53 to 35 per cent.” “A bruising Brexit could shipwreck the British economy” November 17.

Sir, I would argue that has a lot to do with the fact that banks are allowed to leverage much more their equity when financing “safe” home purchases than when for instance financing job creation by means of loans to “risky” SMEs and entrepreneurs.

Because that means banks can earn much higher expected risk adjusted returns on their equity when financing home purchases than when instance financing job creation by means of loans to SMEs and entrepreneurs… and so they do finance much more home purchases than risky job creations.

But Martin Wolf does not think so. He thinks bankers should do what is right, no matter the incentives. I think that is a bit naïve of him.

The way I see it, one of these days all the young living in the basements will tell their parents. “We’ve been cheated. You move down and we move upstairs.”

And it will be hard to argue against that. My generation has surely not lived up to its part of that intergenerational holy social contract Edmund Burke wrote about. 

Wolf ends with “The UK has embarked on a risky voyage in a leaky boat. Beware a shipwreck”. No! I would instead hold that its bank regulators made it overstay in a supposedly safe harbor that is therefor rapidly and dangerously becoming overcrowded.

“A ship in harbor is safe, but that is not what ships are for”, John A Shedd.

Sir, I have no idea if Martin Wolf has kids but, if he had, would his kids have grown stronger if he had rewarded them profusely for staying away from what they believe is risky? I don’t think so.


Leonardo da Vinci, smiling, must be harboring great gratitude to the Fed and ECB for helping his Salvator Mundi to become so highly valued.

Sir, I refer to Josh Spero’s and Lauren Leatherby’s “Record price sparks hunt for Da Vinci painting buyer” November 17.

Surely Leonardo da Vinci wherever he find himself must be smiling and extending his deepest gratitude to Fed’s Janet Yellen and ECB’s Mario Draghi for their QEs and ultra low interest rates. That has allowed him see his Salvator Mundi valued at US$ 450 million much earlier than he could have expected.

And Janet Yellen and Mario Draghi and their colleagues must surely be smiling too. Since Dmitry Rybolovlev bought that painting in 2011 for $127.5m, its current price hints at being successful at reaching an inflation rate target they never dared dream of.

The art curious still do not know who the buyer is, but be sure the redistribution profiteers are also looking after these US$ 450 million to find out how that money escaped their franchise.

Since the latter will surely soon again be talking about inequality I take the opportunity to advance my usual question of: How do you morph such a valuable piece of art into purchasing power that can be used for food and medicines, without the assistance of another extremely wealthy?


What if banks could earn their highest expected risk adjusted returns on equity where they are most needed, like in Blackpool?

Sir, I just read Sarah O’Connor’s harrowing description of what is going on in Blackpool “Left behind: can anyone save the towns the economy forgot? FT Magazine, November 16.

It all sounds like Blackpool belonging to what we read more and more about, that termed as scrap land or junk land.

Sir, can we really afford to abandon those places to who knows who or to what knows what? If we do so what truly bad (or good) things could brew there? We might have some unexplored tools to help stop that or at least not to worsen it.

For instance, our banks, by means of the risk weighted capital requirements for banks are currently allowed to leverage more their equity when lending to what is perceived as safe than when lending to what is perceived as risky; and so banks earn higher expected risk adjusted returns on equity on what is perceived as safe than on what is perceived as risky; so banks, naturally, lend much more to what is perceived as safe than to what is perceived as risky.

That is doubly stupid. First because why would you like to help those who are perceived as safe and that because of that already have more access to credit to have even more access to bank credit? Likewise why would you like to cause those who are perceived as risky and who because of that already have less access to credit to have even less access to bank credit? In other words “safe” London earns banks higher ROEs than “risky” Blackpool.

And secondly because from a bank stability point of view you are acting against what history proves, namely that those perceived as safe are a hundred times more dangerous to bank systems than those perceived as risky. In other words London is riskier to the bank system than Blackpool.

So let us suppose we instead based those risk weighted capital requirements, and the distortion they produce, on where we think bank credit could most be needed or most productive. Then we could perhaps arrange it in such a way that a bank lending to an entrepreneur in Blackpool would be allowed to leverage more than when lending to an entrepreneur in London. And then Blackpool could have a better chance to regain some of its former luster or at least not lose it all.


What if the Norwegian citizens had had the chance to manage their own individual oil funds or share of oil revenues?

Sir, I refer to David Sheppard’s “Norway fund to sell off oil shares” November 17

At first sight we are of course all impressed with that the Norwegian Oil Fund has been able to accumulate US$200.000 per Norwegian. 

The question is though, had the Norwegian oil revenues been paid out to and invested directly by the Norwegians, would they in average have more or less than US$200.000, and would the Norwegians, in average, have been stronger citizens as a result of having to take on that responsibility on their own?

And when we read that what we always thought as the Norwegian Oil Fund or the Norwegian Government Petroleum Fund, is now known officially as the Government Pension Fund Global, the natural question we have is if all that money is now only to go to pensioners? If I was a young Norwegian with ideas of my own and in need of capital, I am not sure I would look too favorably at that possibility.

And let’s be honest about the results. Much of it, or perhaps even most of the financial returns obtained, which are perhaps more than the oil proceeds injected, have been direct consequences of US and Europe having kicked the 2007-08 crisis can down the road, injecting huge amount of liquidity with QEs which, together with the ultralow interests maintained, have inflated all financial assets.

Sir, I was appointed the first diversification manager of the Venezuelan Investment Fund created in 1974, basically a fund very similar to the Norwegian Oil Fund. It took me only two weeks to become convinced it would not work, and so I left.

All this sort of centralized accumulations of wealth sooner or later loose contact with the final beneficiaries and with their original purpose and fast (Venezuela) or little by little (Norway) begin functioning more in terms of the wants and needs of those managing it.

When we now start reading about how that Norwegian fund begins to assign more and more value to issues like sustainability and ethics, which of course is good, we do wonder though how much of that is more based on managerial show-off than on a real mandate from its final beneficiaries.

Again, if I was that young Norwegian in need of capital, or just wanted to construct my own retirement nest, I can easily hear me saying… Great, you do all that but, before you start, give me my share. 

And let’s face it. One reason Norway’s government have been able and willing to set aside oil revenues in the fund is that they receive other type of compensations, like gas/petrol consumption taxes. Norway has the highest gas prices in the world, about $2.40 per liter (Venezuela less than $1 cent per liter)

I hear you Sir. “Here is just a Venezuelan being envious of the $200.000”.

Of course I am envious but, believe me when I say, that as a defender of oil revenue sharing, I would much have preferred my fellow citizens to have only a tenth of that amount, but in the process have learned more of how to stand on their own, and freeing themselves from having to depend on redistribution profiteering governments or fund managers.

PS. What about the Norwegian Fund selling off oil shares? Sounds reasonable but their current 6 per cent invested in the oil and gas sector is not that exaggerated either. Can you imagine what the Norwegians would say if Norway runs out of oil and the Fund stands there with no investments in oil?


November 16, 2017

Edward Luce, what do you mean, is Mark Zuckerberg not paying the taxes he should pay, or is he just no taxed enough?

Sir, I come from a nation, Venezuela, where those in power have wasted hundreds of times more fiscal revenues than the amount of taxes citizens might have evaded. So I am no fan of the redistribution profiteers.

Edward Luce writes: “America’s new economy elites tend to cloak their self-interest in righteous language. Talking about values has the collateral benefit of avoiding talking about wealth. If the rich are giving their money away to good causes, such as inner city schools and research into diseases, we should not dwell on taxes. Mr Zuckerberg is not funding any private wars in Africa. He is a good person. The fact that his company pays barely any tax is therefore irrelevant.” “The Zuckerberg delusion” November 16.

What does Luce mean? Is Zuckerberg not paying the taxes he should pay or is he not taxed sufficiently. If the first Zuckerberg should be fined or even go to jail, if the second Luce is close to being defamatory and should suffer some consequences. 

And Luce also holds “The next time Mr Zuckerberg wants to showcase Facebook, he should invest some of his money in an actual place.”

What on earth does Luce mean? That Zuckerberg does not have his money invested in an actual place? That Zuckerberg keeps his wealth all in cash stashed away under his mattress?

I am clearly against how much rents are derived from monopolistic positions, and would of course like to see that kind of rent capturing to be diminished. But I also believe that once wealth has been created, and that wealth has been allocated to different assets, one should not come to the conclusion that redistributing these would actually result in something better.

It is so typical for wealth-redistributors to suggest, like Luce does, that Zuckerberg would do better funding “a newspaper to make up for social media’s destruction of local journalism” without given a single thought to what would then have to be defunded.

What is most conspicuously absent in the aggressive let’s redistribute the wealthiest wealth proposals, is an explanation of how that is done and of what that implies.

For instance, let us assume Mr Zuckerberg has a $200 million dollar Picasso hanging on the wall. How do you convert that painting into food, health services, education or money for the poor, without having to find another wealthy buyer of that Picasso?

And, if you did cash in the $200 million, how much would reach the less wealthy and how much would just enrich the redistribution profiteers… perhaps making them the neo-wealthy?

The fact is that if Zuckerberg had a $200 million dollar Picasso he has, in a sort of voluntary tax, frozen alternative purchasing capacity on his wall. In this case leading for art to be seen as a good investment, and most probably down the line causing some artists down to get some more income for their art. 

But Sir you would also probably agree with Luce in that journalists are worthier than painters. And I don’t hold that against you… because that’s life. Let anyone not wanting to redistribute something more to himself, cash if you are poor and goodwill if you are Zuckerberg, throw the first stone.

PS. I am an ardent defender of a Universal Basic Income because I find that to be the most efficient way to finance, among others, the creation of decent and worthy unemployments. But that redistribution method also needs to be clear on the implications of what is being redistributed. How much would exist in the Frenchman Thomas Piketty’s Paris’ Museum of Louvre, had it not had been for the existence of the odiously wealthy?


November 15, 2017

Climate-change fight profiteers capture governments (and perhaps FT too). Only citizens can really fight climate change.

Sir, you write “The UN issued a stark warning last month on the scale of the challenge, noting that even if governments act on their plans to cut or slow emissions, national pledges so far add up to only a third of the reductions needed to meet the goals of the Paris accord. Negotiators meeting in Bonn this week are supposed to be crafting rules to ensure countries step up their efforts.” “A sharp reality check on the climate challenge” November 15.

Forget it! The Paris agreement was just another great photo-op. If you really want to be able to do what it takes to save our pied-à-terre, you have to keep out the few big green profiteers able to lobby governments (and perhaps You too), and incorporate all the citizens in that quest.

How? Huge national carbon taxes with all its revenues shared out equally to all citizens. The moment a citizen gets a check and is himself turned into a small profiteer of the fight against climate change (and of the fight against inequality) all changes.

Sir, you have published a letter of mine before describing this type of solution, but you might be mightily targeted by those green profiteers too. So beware!


Martin Wolf, we sure don’t need a Basel Committee for Large Technological Companies Supervision

Sir, Martin Wolf ends his discussions about the monstrously large technological companies (Apple, Alphabet, Microsoft, Amazon and Facebook, Alibaba, Tencent and Samsung) with: “What are the implications? They are that our futures are too important to be left to the mercies of the technology industry alone. It has done magical things. Yet nobody elected it master of the universe. Policymakers must get an intellectual grip on what is happening.” “Taming the masters of the tech universe” November 15.

Does Wolf really believe some probably self appointed technocrats should be able and capable enough to stand in for the current masters of the tech universe, for all these to work more smoothly and safer without any unexpected consequences?

I am reminded of AEI’s Alex J. Pollock’s 2015 article “Martin Wolf’s childlike regulatory faith”. That article referred to Wolf’s “naïve faith in the future superior knowledge and future ability of central bankers and other bureaucrats successfully to tell other people what to do”.

Sir, just look at what those who appointed themselves as the Regulation Masters of the Universe of Banks have done:

They have allowed banks to leverage differently with different assets. As a consequence banks have different capability to obtain risk-adjusted returns on equity with different assets. This has dangerously distorted the allocation of bank credit to the real economy, in favor of what could be leveraged the most. Now instead of banks wanting savvy loan officers to maximize their ROE, they look mostly for equity minimizers to do that.

And, by considering the risk of the banks assets per se, and not the risk those assets represent to the banks, they got their whole risk-weighting totally wrong. A clear example of that is Basel II’s risk weight of only 20% for the dangerous AAA rated and of 150% for the so innocous below BB- rated. Sir, have you ever seen more inept Masters of the Universe?

Would the banks left alone to the markets be able to leverage 62.5 times to 1 only because an AAA to AA rating was present? No!

Would the banks left alone to the markets be able to lend to sovereigns without any capital at all as Basel II’s 0% risk weighting of sovereigns implies? No!

Would we have suffered to 2007-08 crisis had it not been for these regulations? No!

Do I suggest we should leave the tech monsters to do what they want? No, but I don’t think markets will allow them to reign alone and do what they want forever either… things do change, just look at GEs and Siemens.

For instance I can feel some ad-blockers around the corner that could help us users to charge Google and Facebook something for them using our own preferences to earn their advertising revenues.

And I can also smell additional taxes coming up in the future, like for instance a minuscule cost for each advertising connection in social media, which would make sure the marginal cost of exploiting our limited attention span is not zero. But these taxes will hopefully be shared out to all by means of universal basic income mechanisms instead of increasing the franchise value of the redistribution profiteers.

And to combat “people of ill” engaging in “deliberate dissemination of dangerous falsehoods”, much could be helped just by means of having an independent credible register that guarantees us who do not want to engage with unknown strangers, that behind a communication stands a correctly identified and not hacked real person.

PS. Here are some questions I have on tweets and tweeting etiquette that I tweeted.

If without any bad intentions I have re-tweeted a tweet that turns out to be fake news or fake and damning accusations, could I be sued?

If I re-tweet a tweet that I know or should know contains fake news or fake damning accusations, should I be sued?

Don’t we need a sort of ISO quality standard on tweeting that we can adhere to?

Don’t we need somebody to guarantee us that a tweeter is a real identifiable person that has not been hacked?


November 14, 2017

For Britain’s and EU’s sake, Brexit negotiations should not be left exclusively in hands of Leavers and Brusselites.

Sir, most of the opinions on Brexit I have read in FT over the last year, seem to me have more to do with Remainers wanting it to turn out so bad so they can gorge on the “we told you so”, than with making the best out of something difficult.

In the same vein, on EU’s side, it seems to me that the Brusselites want to negotiate more in order to satisfy their by Brexit vote hurt egos, than with making the best out of something difficult.

Janan Ganesh writes in “The real saboteurs of Brexit are its own amateur leaders” November 14. So, if Leavers do not have what’s needed to negotiate Brexit well, as, that does not exculpate the Remainers from helping out in any which way they can… (or move out of Britain)

Gideon Rachman writes in namely: “Imposing a humiliating settlement on Britain might even seem economically advantageous. But the long term political and strategic consequences of a bitter Brexit are much harder to calculate.” “Britain is at the mercy of Brussels” November 14. And so, in a similar vein, the Brusselites need to be continuously reminded of that they could also be hold accountable for a bad Brexit.

If I were a British national and a Remainer, the first thing I would do is to launch a campaign messaging the following:

“Europeans since Britain will remain close to you… and since you could be next, it behooves you to keep an eye on your Brusselites so that Brexit goes well for all of us. The last thing we need in Europe at this moment is a neo-Versailles treaty.”

PS. As a Polish citizen, I would argue: “Brusselites, remember that many of us in EU have more in common with Britain than with some of our other Europeans”


November 13, 2017

Now, ten years after, have all quantitative easing and low interest rates just kicked the crisis can down the road?

Sir, Martin Wolf writes: “A… criticism is that easy money policies have worsened inequality, especially of wealth. But keeping the post-crisis economy in recession in order to reduce wealth inequality would have been insane. In any case, wealth inequality matters less than inequality of incomes, where the effect of raising asset prices is to lower returns for prospective owners, so improving inequality in the longer term. Above all, the worst form of inequality is to leave millions of people stuck unnecessarily in prolonged unemployment.” "Unusual times call for unusual strategies from central banks" November 13.

We are now into ten years of post-crisis. How can Mr. Wolf be so sure that if painkillers like Tarp and quantitative easing had not been prescribed, that we would now be in a worse position in terms of unemployment and in terms of inequality? Perhaps it only kicked the can down the road, a can that could begin to violently roll back on us.

Sir, in August 2006 you published a letter of mine titled “Long-term benefits of a hard landing”. In it I wrote: 

“Why not try to go for a big immediate adjustment and get it over with? Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom in a couple of decades.

This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.”

I agree with that “wealth inequality matters less than inequality of incomes” but when Wolf then holds that “the effect of raising asset prices is to lower returns for prospective owners, so improving inequality in the longer term”, it would seem he agrees with the benefits of a hard landing… as long as it is not on his watch.

In my Venezuela we have seen how millions of citizens who had reasonable expectations for the future, are now in desperate conditions. They have learned the hard way that no matter how much they might hold in assets, this means little if at the time you want to convert your assets into actual street purchasing capacity, there is no one there to buy these. And, as we sure have learned, to move from very good to very bad can be lightning fast. 

As I have argued… if government and regulators prioritize the financing of the sovereigns and of houses so much more than the financing of SMEs and entrepreneurs, we will be heading to a future of much poverty, lived out in an abundance of less and less maintained houses.

Wolf ends with: “given the instability of finance, today’s low neutral interest rates and the unwillingness of governments to use fiscal policy, the willingness of central banks to adopt unconventional policies may be all we have to manage the next big downturn.

Yes we might be in dire need of “unconventional policies”, but not necessarily from the central banks.

For instance we should urgently think of creating decent and worthy unemployments, to face the possibility of a structural lack of jobs. For that I would begin studying how to tax robots and artificial intelligence, and or how to reduce the margins of the redistribution profiteers, in such a way that it permits us to design and fund a universal basic income.

The UBI could initially be small, perhaps just US$ 100 per month, something to help you get out of bed, not so large as to help you stay in the bed, but the system has to be in place before social fabric breaks down, or before populists make hay of our problems.


November 11, 2017

Is allowing banks earn the highest risk adjusted returns on equity with what’s “safe” a nudge, a sludge or a grudge?

Sir, Tim Harford writes “Nudge, sludge or grudge, we can change this. And we should start by asking ourselves whether when it comes to news, information and debate, we have made it difficult to do the right thing — and all too easy to stray.” “Nudging and the art of darkness” November 10.

Art of darkness? How and by whom were our bank regulators nudged into believing that stupidity that what bankers perceive as risky is dangerous and that what is perceived by them as safe is safe?

Because as a consequence we got the risk-weighted capital requirements for banks that allow banks to leverage much more with what is perceived as safe than with what is perceived as risky; which means banks will earn higher risk adjusted returns on equity with what’s “safe” than with what’s “risky”; which means banks will, dangerously for the bank system, lend too much against too little capital to what’s safe, and, dangerously for the real economy, lend too little to what is perceived as risky like SMEs and entrepreneurs.

PS. When I try to see what @TimHarford is up to, I am given the message “You are blocked from following @TimHarford and viewing @TimHarford’s tweets”. Does Tim Harford believe it is so easy to get away from my arguments?

PS. What would Templar Grand Master Jacques de Molay burned in 1307 say about a 0% risk-weightof sovereign Phillip IV?

PS. “50 Things That Made the Modern Economy”, and just 1 That is Bringing it Down: Regulatory Risk Aversion 


Perceptions change realities. In banking, what’s perceived risky is safe and what’s perceived safe is dangerous

Sir, John Authers writes: “It is not the risks we worry about that harm us. It is what Donald Rumsfeld once called the “unknown unknowns” that we were not thinking about and did not even know about. In markets, assets deemed high risk tend to be priced so that they do little harm when things go wrong”, “Crises happen when what is thought to be safe surprises us”, November 11.

Precisely. So how would now Authers explain the logic behind the risk weighted capital requirements for banks, the pillar of current bank regulations? That which in Basel II risk weighted what is AAA rated with 20% and the below BB- with 150%. That which by allowing banks different leverages for different assets senselessly distorts the allocation of bank credit. That and about which I have written more than 2.600 letters to FT and that it has decided to ignore.

Sir, when will you dare to wake up to that harrowing fact that our banks are in the hands of regulators that have no idea of what they are up to? Or do you really think that all this is a minor problem?


November 10, 2017

When a loan to buy a house is worth more to a bank regulator than a loan to a job-creator, things cannot end well.

Sir, Chris Giles writes: “The reason why we have more “boomerang families” and grown-up kids applying to “the bank of Mum and Dad” is because forming a new household is so expensive for young people. Much pricier than it was for those of us who bought houses in the 1990s.” “However you analyse it, housing is in a mess” November 10, 2017

With Basel II of 2004, bank regulators, assigning a 35% risk weighting of the basic 8% capital requirement, allowed banks to leverage their equity 35.7 times to 1 when financing residential mortgages. But if financing an unrated 100% risk weighted entrepreneur, those who could help create the jobs our young needs to be able to buy their own houses, then the banks were only allowed to leverage their equity 12.5 times to 1.

So if entrepreneurs might have had a 25% possibility of having their credit applications approved in the old good days of one capital for all and all for one capital, now that could have been reduced to 5%.
So should we really be surprised if our young ones end up living without jobs in their parents’ basements?

So should it surprise us if those young one day say: “We were cheated. Ma-and-pa, you move down to the basement, now it’s our time to live upstairs”


Should one want to have anything to do with an investment bank like Goldman Sachs that finances odious regimes?

Sir, I have no idea about what Robert Smith describes in “Goldman questioned on Verisure debt sale”, November 10; and, though it sure sounds a bit shady, I have not enough interest in pursuing the understanding of it.

That said, I would have to add though: Do you really want to have anything to do with an investment bank that finances odious regimes, like that of Venezuela?

If yes, where do you draw the line? North Korea?

PS. The vultures out there should not forget that between the case of Argentina and that of Venezuela there are some fundamental qualitative ethical differences.


November 08, 2017

Fewer younger and with its banks working with standards appropriate for the much older, dooms Brazils economy

Sir, Martin Wolf writes: “Brazil is in economic, political and moral crisis…too many people are unemployed, the economy is too feeble, the politics too corrupt, and the state too captured…Brazil needs a political and economic rebirth. The crisis makes this necessary. If that does not happen, the future looks sad.” “Brazil’s crisis creates an opportunity” November 8.

Wolf recommends, among other “A funded pension scheme could raise national savings. The government must also have the freedom to control the numbers and pay of civil servants. Doing all this would liberate resources for other areas”

Indeed. But for those resources to be able to flow to where they can be most productive, Brazil also needs to rid itself of that odious regulatory risk-aversion imbedded in the risk-weighted capital requirements for banks. If not Brazil’s future, as well as that of any other nation that keeps those regulations, is doomed to be very bleak.

From “1970 to 74 in 2017…the fertility rate in Brazil has fallen from five children per woman to just 1.7… the population is ageing”.

I understand that for one of Mr Wolf’s age (and perhaps even mine) a risk minimizing investment strategy makes sense but were any financial advisor to suggest that to a young professional starting out, he might very well lose his accreditation. 


Could investors in Venezuelan liabilities have thought its government was up to something good? No! So don’t pay them

Sir, Robin Wigglesworth writes: “S&P last week downgraded Venezuela’s rating to the second-lowest rung possible without actually being in default, arguing there is an even chance of a full default within the next three months… Can Venezuela extricate itself from this mess? “Investors left guessing over Venezuela’s liabilities” November 8

Sir, if somebody financed a bank heist should those creditors get their money back if the heist was unsuccessful?

This is not just about Venezuela. It behooves all citizens everywhere to make sure that if creditors finance something they know is bad for the people of its country, only to obtain high risk premiums, they should not be able to expect the people of that country to sacrifice themselves in order to repay that debt.

Or in even clearer terms, should the freed prisoners of a concentration camp be expected to repay those who financed the building of it? 

Sir, we often hear the term “odious debt”. It is high time we concentrate in defining what should be considered as odious credits… because that is where it all starts. 

PS. There could also be reasons to think of “odious regulations”. If European bank regulators had not risk-weighted the capital requirements for banks when lending to Greece at 0%, then Greece would have saved itself much suffering.


November 07, 2017

The 0% risk weighting of sovereigns is a very subtle version of brutal top-down Stalinism. It will not work either

Sir, Sergei Guriev, the chief economist of European Bank for Reconstruction and Development concludes in that “The Great Soviet Experiment demonstrated the deficiencies and unsustainability of the non-market model” “The Russian Revolution offers economic lessons

But there, right in front of his eyes, he has bank regulations that with Basel I of 1988 decided, with respect to the risk weighted capital requirements for banks, that the risk weight of a sovereign is 0% and that of the citizens is 100%.

As a consequence banks can leverage their equity more, and therefore obtain much higher expected risk adjusted returns on equity when lending to the sovereign than when lending to the citizen. And therefore banks will lend much more to the sovereign than they would otherwise have done.

Sir, is that just not a much more subtle version of the brutal top-down Stalinism that Guriev writes about? Of course it is! And because it is de facto premised on that government bureaucrats will be able to use bank credit for which they are not personally responsible for better than the citizens, it will not work either.

Unfortunately, it would seem like that the Financial Times wants that statism to remain invisibly subtle.


November 06, 2017

Professor Summers. Keeping mum on how sovereign public borrowings are currently subsidized is cheating on the future

Sir, Lawrence Summers writes: “Borrowing to pay for tax cuts is a way of deferring, not avoiding, pain. Ultimately the power of compound interest makes even larger tax increases or spending cuts necessary. But in the meantime debt-financed tax cuts raise the trade deficit, and reduce investment thereby cheating the future.” “A Republican tax plan that would help the rich and harm growth” November 6.

Sir, Prof Summers is entirely correct in that “Borrowing to pay for tax cuts is a way of deferring, not avoiding, pain”. But, one major reason for why such borrowing can occur is that it is currently contracted at artificially low rates.

With the regulatory subsidy imbedded in the capital requirements for banks’ 0% risk weighting of sovereign debt; and with the stimuli provided by the Fed with its low interest policy and huge quantitative easing programs, America’s current government’s borrowing costs do not reflect the real undistorted rates.

Without these non-transparent help from their statist colleagues, there is no doubt the interest rates would be higher, the current fiscal deficit higher, and the adjustments needed much clearer.

Sir, since Professor Summers has been consistently ignoring this, he is willing or unwittingly helping to cheat the future too.


November 05, 2017

What stops a Supreme Court of Justice of Venezuela in exile, to request the embargo of oil unduly received by Russia?

Sir, you suggest that one of the few ways the Maduro regime could manage the restructuring of PDVSA’S bonds, is that “Moscow might… extend the cash Caracas needs to service PDVSA debt in return for cut-price stakes in local oil ventures”, “The geopolitics of Venezuela’s debt” November 5.

You really think Moscow would throw its relative scarce good money at this?

The Venezuelan Constitution in its Article 12 establishes: “Mining and hydrocarbon deposits, whatever their nature, existing in the national territory, under the territorial sea bed, in the exclusive economic zone and on the continental shelf, belong to the Republic, are the property of the Public domain and, therefore, inalienable and imprescriptible.”

And so, though I am not a lawyer, it would seem that any negotiation that assumes that local or foreign oil ventures receive an ironclad guaranteed access to Venezuela’s oil might be very naive.

I ask, if Russians end up taking oil from Venezuela under a shady deal not approved by its real General Assembly, that which is recognized by so many countries, what stops its Supreme Court of Justice in exile to request international courts to embargo it?

As I see it the best thing to happen would be a constitutional reform in Venezuela that decrees all net oil revenues belonging equally to all its citizens. What judge will then order the embargo of oil that belongs to citizens who at this moment need it to avoid death from starvation?

And the biggest benefit of doing so would be freeing the Venezuelans from having to live under the powerful thumb of a government that centralizes all that oil revenue, 97% of all the nation’s exports, in very few hands… sometimes even the hands of outright bandits.

Sir, those who awarded odious credits, should not be able to negotiate behind the back of Venezuela’s people, with those who contracted odious debts.


We need a contact-tax to make sure social media profiles us more adequately, and leave us some time-off to think.

Sir, Tim Harford writes: “fake news entrepreneurs have realised that it is far more profitable to invent eye-catching fables than to research and confirm the everyday truth”, “How to poke Facebook off its perch”, November 4.

The real reason for that, a bit hard to acknowledge, is that most of us (me included) find it much more amusing to read eye-catching fables than blah-blah truths.

So given our weaknesses of falling for fables; and given our de-facto limited attention span, 60 minutes times 24 hours per day; and given our need for some time-off so we do not forget how to think and reflect on what we are being fed with, we must put up some very high walls or dig some very deep moats as self-defense.

At this moment Facebook can send out a message to two billion users at basically zero marginal cost!

So one way could be forcing social media and their colleagues to pay a minuscule fee for any message sent to us that does not originate directly from our private friends; call it a contact-tax.

That would at least force Facebook to target us more carefully. “Profiling us more carefully”? That might sound awful, but being wrongly profiled should be worse… or perhaps not.

But of course the revenues of any contact-tax should not go to increase the redistribution profiteers’ franchise value, but be shared out among us all by means of a Universal Basic Income.

PS. This does not mean I give up on my right to strive for an intellectual property right, a copyright on my own preferences, in order to have something more to bargain with in this data driven world.