March 17, 2018

In not listening sufficiently to the European people, which includes the British, resides great risks for the two technocrats negotiating Brexit

Sir I refer to George Parker and Alex Barker discussing Michel Barnier and David Davis, “Meet the Brexit negotiators” March 17.

For me the best of the Winter Olympics 2018 was seeing Sofia Goggia singing her Italian national anthem with such an enthusiasm. I am sure Europe has not been able to remotely capture the hearts of Europeans in such a way; and the reason for that must foremost the technocratic haughtiness of Brussels.

I have not the faintest idea if it rests on some real event, it probably doesn’t, but the most powerful moment depicted in “The darkest hour”, was when Churchill journeyed the London Underground to hear the voice of regular people in the subway.

And that is what I have a feeling neither Davis nor Barnett did enough of. Whatever the result of Brexit, they might be in for a great surprise, because, much more than arteries and veins are at stake for Europe, including Britain, it is the heart that has to be nurtured and cared for.

What if for instance to Sofia Goggia the relation Italy-Britain is much more important than the relation Italy-EU-Britain?

I have no doubt those who voted for Brexit really wanted more out of Brussels than out of Europe... because that I can understand.

Sir, you don’t have to go underground and travel subways to know what people might want. Some well designed, not biased, public opinion research on the wished and not wished for outcomes of Brexit, in all countries involved, would be the minimum I would have required before any first Brexit meeting.

PS. Just in case you are curious, the worst for me of the Winter Olympics 2018, was having to suffer with Egvenia Medvedeva when not winning her gold.


March 16, 2018

So now Brussels wants to join forces with Facebook, Google and alike, in order to also extract value from our personal preferences.

Sir, Mehreen Khan, Alex Barker and Rochelle Toplensky report that “Brussels is thinking about a “levy, which is likely to be set at a rate of 3 per cent… raised against advertising revenues generated by digital companies such as Google…fees raised from users and subscribers to services such as Apple or Spotify, and income made from selling personal data to third parties… it will raise about €5bn a year.” “Brussels proposes levy on Big Tech digital revenues” March 16.

For years I have argued that we users should have right to charge something for our preferences disclosed on the web, not only because that could yield a partial funding of a Universal Basic Income scheme, but, even more importantly, because that would help to limit the bothering and the waste of our limited attention span.

But seemingly Brussels wants to hear nothing about that, they as self appointed redistribution profiteers, want in on that revenue stream.

It is just like if governments, instead of helping to rid ourselves of the fastidious robocalls selling us all kind of products and services, would now share the incentives to push those calls even more.

Sir, though I do not live in Britain, or in Europe for that sake, I was pretty sure I would not vote for a Brexit… but every day that passes, and I read about things like this, the less sure I am of that.


March 09, 2018

Ex post dangers are inversely correlated to ex ante perceptions of risk.

Sir, Stephen King writes: “One of the main “costs” of global economic success… is excessive risk taking. Put simply, the good times don’t tend to last because we start to do stupid things that bring them to an end. Until the equity market wobbles in early February, most investors appeared to be as complacent about potential risk as they had been ahead of the crisis.” “Global good times make the world act stupidly” March 9.

Is that really excessive risk taking, or is not more a belief that there is little risk?

It is surprising how much ex post dangers get to be confounded with ex ante perceptions of risk.

The most dramatic example of that are the bank regulators who, in Basel II, assigned a risk weight of 150% to the below BB- rated, that which everyone knows is risky, and only of 20% to the AAA rated, that which everyone can so dangerously believe is very safe?

That our banks have landed in the hands of such mentally feeble minds as those of the Basel Committee, is indeed a tragedy.

Per Kurowski

March 07, 2018

There is not too much need for banks to game regulations when regulators have already gamed these so much.

Sir, John Plender addresses correctly many current concerns with the financial system in general and with banks in particular “Beware the threat of low-quality debt and opaque shadow banks” March 7.

But when he writes: “Remember, among the many things that lay behind the financial crisis of 2008-9 was the banks’ urge to game the Basel capital adequacy regime”, then I just have to step in.

There was no need to game regulations that had already been so much gamed by the regulators. Basel II, with its standardized risk weights, risk weighted any private sector carrying AAA to AA ratings with 20%, residential mortgages with 35% and, with much solidarity; European regulators risk weighted Greece 0%.

Translation: Based on the basic capital requirement of 8% banks needed to hold 1.6% in capital against the AAA to AA rated, 2.8% against residential mortgages and 0% against loans to sovereigns, like Greece.

Translation: Banks were therefore allowed to leverage their capitals 62.5 times with assets rated AAA to AA rated, 35.7 times with residential mortgages and limitless against loans to sovereigns, like Greece.

Also had regulators required banks to hold 8 percent against all assets the wriggling room for gaming would have been much reduced.

The risk weighted capital requirements for banks are most certainly the most absurd regulation concocted ever. It only guarantees that banks will dangerously overpopulate safe havens against especially little capital; and that those risky bays where for instance entrepreneurs are usually found, and that need to be explored for our economy to thrive, will not be sufficiently funded.

This should have been absolutely clear for more than a decade but yet, this is being obsessively ignored by most.


The Basel Committee’s tariffs of 35% risk weight on residential mortgages and 100% on loans to entrepreneurs, is pure protectionism.

Sir, Martin Wolf, with respect to President Trumps’ indication that “he would sign an order this week imposing global tariffs of 25 per cent on steel and 10 per cent on aluminum” writes “This is a purely protectionist policy aimed at saving old industries” “Trump’s follies presage more protectionism” March7.

Absolutely! I could not agree more. But what I cannot understand is why Wolf does not react in the same way against the protectionism imbedded in the bank regulators’ risk weights? For instance is not a 35% risk weight on residential mortgages and of 100% risk weight on loans to entrepreneurs represent even a worse protectionism than Trump’s?

That protectionism allows banks to leverage their capital 35.7 times with residential mortgages and only 12.5 times with loans to entrepreneurs.

That protectionism has banks avoiding financing the "riskier" future in order to refinance the older "safer present". Does that not sound extremely dangerous?

PS. And a 0% risk weight of the sovereign and 100% the citizens, is that not the mother of protectionism of statism?


March 06, 2018

Beware, the more you trust data, the more you have to be absolutely sure about how to interpret it, and about what to do with it.

Sir, John Thornhill writes: “In his Alan Turing Institute lecture, MIT professor Sandy Pentland outlined the massive gains that could result from trusted data… the explosion of such information would give us the capability to understand our world in far more detail than ever before”, “Trustworthy data will transform the world” March 6.

Indeed, but that also leads to other bigger dangers, not only because we might trust that trusted data too much, but also because we might not know how to interpret or what to do with that trusted data.

Like for instance the regulators with their current risk weighted capital requirements for banks. These establish that the riskier an asset is perceived the larger the capital a bank has to hold against it. Does that make sense? Absolutely not!

It is not if the perceived risk is correct, meaning the ex ante risk perceived ends up being the real ex post risk, that poses any major danger for our banking system. It is if the risk perceived is incorrect, that the real big dangers arise. And, of course, the safer an asset is perceived, and the more bankers trust that perception to be right, the longer and the faster it can travel down the dangerous lane of wrong perceived risks.

What detonated the most the 2007 crisis? The securities backed with mortgages to the subprime sector rated AAA by “trustworthy” credit rating agencies, in fact so trusted that the Basel Committee, with Basel II, allowed banks to leverage 62.5 times their equity with such “safe” assets.


March 05, 2018

In terms of a short-termism that harms the long run, few are as guilty as current bank regulators.

Sir, Jonathan Ford quote US academic Lynn Stout with “The pressure to keep share prices high drives public companies to adopt strategies that harm long-term returns: hollowing out their workforce; cutting back on product support and on research and development; taking on excessive risks and excessive leverage; selling vital assets and even engaging in wholesale fraud.” “Shareholder primacy lies at heart of modern governance problem” March 5.

Indeed, but I hold that low investments and poor productivity is also the result of regulators’ risk weighted capital requirements for banks based on ex ante perceived risks. These focuses on making the banks safe today, at the price of making it all worse off tomorrow, ex post. How? Because they dangerously push banks to overpopulate, against especially little capital, those safe havens that have always been the main threats to our banking systems; and because they keep banks from exploring those risky bays, those with entrepreneurs and SMEs, those that could give us the growth and the jobs of tomorrow.


March 03, 2018

In terms of estrogen and testosterone, are there differences between bank exposures to what is perceived risky, and risky excessive exposures to what is perceived as safe?

A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” Mark Twain

Sir, Cordelia Fine writes: “Risk management in financial institutions is too important to be guided by scientific ideas well beyond their sell-by date. Blaming financial misadventures on a testosterone-fuelled male drive distracts us from what’s more likely to make a difference: regulation and culture. The best in-house antidote for bankers selling junk products and regulators bending to conflicts of interest isn’t women; it’s a dismissal slip”, “The Testosterone Rex delusion” March 3.

Absolutely! But with reference to the risks taken on by the banks that caused the 2007/08 crisis, that dismissal slip should foremost be given to regulators for having the ex ante perceived risks of banks assets substitute for the ex post dangers to our banking system.

And with reference to the absurd low response of the economy to the extremely high stimulates provided, the regulators should also be given that dismissal slip, for ignoring the purpose of banks, something that includes the efficient allocation of credit to the real economy.

Fine references Swedish journalist Katrine Marçal with whether “an investment bank named Lehman Sisters could handle its over-exposure to an overheated American housing market.” That is an ex post description that has little to do with the ex ante perception of the risks, and clearly less to do with bankers wanting to lend when it rained.

If some testosterone is needed to understand that risk-taking is the oxygen of development, and so the need for banks to also lend to those perceived as risky, like to entrepreneurs, then the regulators showed a fatal lack of it.

Their risk weighted capital requirements, more ex ante perceived risk more capital – less risk less capital is as dangerously nonsensical as can be. These only guarantee that when the true risks for our banking system happens, namely the dangerous overpopulation of safe havens, banks will stand there with especially little capital.

By allowing banks to leverage much more with assets perceived, decreed or concocted as safe, like AAA rated securities, like residential mortgages, like sovereigns (Greece) they allowed banks to earn the highest expected risk adjusted returns on equity on what was perceived as safe. Mark Twain could have said that made bankers wet dreams come true; and that was, while playing, the music to which Citigroup’s Chuck Prince held bankers had to dance.

And so, since what the members of the Basel Committee and the Financial Stability Board and most of their colleagues have really proven, is to be suffering from an excessive risk aversion, what would then Cordelia Fine opine, in terms of testosterone and estrogens?

Here is an aide memoire on the major mistakes with the risk weighted capital requirements


March 02, 2018

“Relax” or “tighten” has little to do with better regulation of US’s banks. Revise, correct and simplify, is what it should all be about.

Sir, I refer to Hal Scott’s and Lisa Donner’s discussion “Head to head: Should the US relax regulation on its big banks?” March 2.

Hal Scott writes: “There is empirical evidence that higher bank capital requirements cut lending and economic growth. A recent Fed paper concludes that a 1 percentage point rise in capital ratios could reduce the level of long-run gross domestic product growth by 7.4 basis points.”

And Lisa Donner writes: “Increased capital requirements lower the return on equity and, by extension, the bonuses linked to it. The desire of a small number of very wealthy people to become still richer should not drive public policy.”

They both, obviously each one from to the point of view of their respective agendas are correct in recognizing that capital requirements have clear effects. But then, as is unfortunately the current norm, they both ignore the problem of the distortions in the allocation of credit that different capital requirements produce.

And, if there is any problem in current bank regulations that needs to be tackled, that is getting rid of those distortions. If there is one analysis needed that is whether the bank’s balance sheets correspond with the best interests of our economies. The answer would be “NO!”

Scott asks: “Do we really want banks to hold enough capital to survive events that have no US historical precedent? If such an extreme economic event did occur, would any amount of capital be enough to withstand the panic it could trigger?”

Ok, agree, but then why should we want our banks to keep especially little capital when such events occur? Like when 20% risk weighted AAA rated securities exploded?

Scott, mentioning stress tests that depend on secret government financial models to predict bank losses argues: “avoid ‘model monoculture’ in which every bank adapts its holdings in order to pass the tests and they all end up holding assets the government model favors. A diversity of bank strategies is preferable given that risks are hard to predict.”

Absolutely and that is why, April 2003, as an Executive Director of the World Bank I held "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

The stress tests, by focusing too much on the risk flavor of the day, as I have written to you before, are in themselves huge sources of systemic risk.

Scott informs “The living wills process requires banks with more than $50bn in assets to hold minimum amounts of “safe” assets; currently this stockpile totals more than $4tn in government debt”

Holy moly, $4tn is close to 20% of all US public debt. Is there really no interest for trying to figure out where real rates on US government debt would be if banks were not given the 0% risk-weight incentives for these debts, or, alternatively, be forced by statist regulators to hold lots of it?

Donner argues: “There is no fundamental trade-off between sound regulation of the financial system and shared prosperity. Quite the opposite. Even as tighter bank capital and liquidity requirements were phased in after the crisis, bank credit to the private sector has surged to new heights as a percentage of global output.”

But really, is that credit surge an efficient one? Are banks financing enough the “riskier” future, or are they mostly writing reverse mortgages on our “safer” present economy? 

Sir, what kind of crazy model could hold that economic growth is the result of banks being able to earn their highest risk adjusted return on equity on what is perceived, decreed or concocted as “safe”, and so avoid lending to “risky” entrepreneurs? 


February 26, 2018

Bank regulators could derive valuable lessons from pension scheme difficulties.

Sir, Jonathan Ford while discussing Carillion’s pension schemes writes: “deficit repair should reasonably leave space for the company to foster future growth, and thus preserve the ongoing viability of the sponsor.” “Carillion’s pension crisis defies any magic legal cure” February 26.

Absolutely. But does that not apply to bank regulations too? As is the risk weighted capital requirements give banks huge incentives to stay away from financing the “riskier” future, like entrepreneurs, in order to refinance the safer present, like houses.

And Ford adds: The worst outcome would be one that simply encouraged trustees to “de-risk” schemes further by purchasing highly priced gilts to protect themselves against mechanical increases in short-term liabilities caused by falling market yields — a pro-cyclical practice known as “liability-driven investment”.

In essence that is what the risk-weighted capital requirements do. They doom banks to end up gasping for oxygen in dangerously overpopulated safe-havens against especially little capital, leaving the riskier but perhaps more profitable bays unexplored.

Ford argues: “It’s not clear though what any “tough new” rules could have done to help this messy situation.”

I know too little about Carillion but, what I do know, is that pension funds in general, government’s included, have been way too optimistic when estimating potential real rates of return in the order of 5% to 7%. 3% would be more than enough of an optimistic real rate of return, given the so many unknown factors out there.


Rana Foroohar. Please ask yourself a question and, if you cannot answer it, do ponder why.

Sir, I refer to Rana Foroohar’s “Three questions for the Fed’s Powell” February 26.

Ms. Foroohar (and you too Sir) should ask herself: why do regulators want banks to hold more capital against what, by being perceived as risky, has been made quite innocous, than against what, because it is perceived as safe, is so much more dangerous?

And if could not come up with a truly convincing answer, then that should give her a clue on that something very strange is going on in the field of bank regulations.

And if she had gotten to that point, then it should not be too hard for her to begin to understand how those different capital requirements, which allows for some assets to be leveraged much more than others, might distort the allocation of credit to the real economy… and thereby affect its “real non-financialised growth”

And at that point she would surely add, that same question she could not answer, to those three she proposes to ask Powell.

Foroohar also references companies “buying up the higher-yielding bonds of riskier companies at a favourable spread and holding those assets offshore [and that now after] President Donald Trump’s new tax rules… They will simply be able to move their money wherever they want, whenever they want, in cash.”

“Cash”? In order to become cash, all those assets the companies have bought and held offshore must be sold. Would that not have any consequences?


February 23, 2018

Where are the occupational licensing requirements when they are really needed, like in bank regulations?

Sir, Simon Samuels writes: “A manufacturing company would not be expected to operate without knowing its cost of production. Not knowing how much capital is needed to lend money is the banking equivalent” “Confusion over bank capital requirements fails us all” February 23.

So there is a banking consultant at Veritum Partners, clearly stating (confessing) that the production cost of credit depends on the capital requirement. Of course, less capital equals lower credit production cost, higher capital higher production cost.

And so again I ask, for the umpteenth time, why on earth should regulators, with their risk weighted capital requirements favor those ex ante perceived as safe with lower cost produced credit, than those ex ante perceived as risky? Do they not understand that dangerously distorts the allocation of bank credit? Do they not know that guarantees, sooner or later dangerously overpopulating a safe haven… against especially little capital?

I have recently read that in forty-one US states license for makeup artists is required and in thirteen states you need a license to be a bartender. So tell me, when are the occupational licensing requirements when we really need them, like for that extremely delicate function of regulating banks? The lack of it has saddled us with regulators who believe that what’s perceived as risky is more dangerous to our bank system that what’s perceived, decreed or concocted as safe! Unbelievable eh?


February 22, 2018

How long are you going to allow statist bank regulators subsidize the public sector borrowings with a zero percent risk weighting?

Sir I refer to Kate Allen’s and Chris Giles write “The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year” “Rising tide of sovereign debt to hit rich nation budgets, warns OECD” February 23.

I do not know what the total OECD debt was in 1988, but the US public debt was t$2.6 trillion when then statist bank regulators assigned it a 0% risk weight. At end of 2017, much because of the subsidies imbedded in that 0% weight, US’s public debt was now US$20.2 trillion. It still has a 0% risk weight.

In 2004, in a letter you published I wrote: We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.

I came then from a development country, Venezuela, but that comment clearly applies to the OECD too.

In December 2009, on the eve of the new decade, FT also published a letter in which I wrote: “My worst nightmare is that unmanageable Versailles-type public debts will become fertile ground for those monsters that thrive on hardships”. That nightmare is only getting worse and worse.


February 21, 2018

If with Brexit Britain can break lose from Basel’s bank regulations, then it could come up on top of EU

Sir, Martin Wolf writes: “The recently leaked UK government analysis concludes that with Brexit, under a Canada-style deal, UK gross domestic product might be 5 percentage points lower than it would otherwise be, after 15 years — a loss of about a fifth of the potential increase in output by that time”, “Britain’s road to becoming the EU’s Canada”, February 21.

Has someone in the UK government analyzed what long term impact on UK’s gross domestic product the risk weighted capital requirements for banks have? I mean because since this regulation gives banks great incentives for staying away from financing the riskier future and just keep to re-financing the safer present, that most be causing some serious costs for the future.

Again, any bank regulations that is so stupidly based on the assumption that the ex ante perceived risks reflects adequately the ex post danger to the bank system, has to turn out incredibly costly.

So, if Brexit allows Britain the opportunity to break lose from these regulations, and Britain capitalizes it, while EU stay hooked on it, then Britain could come up over EU, and many in Europe would want to Baselexit too.

Why, when the world is going through so many not entirely understood changes, should Britain limit itself to cry over what it can lose with Brexit, while giving so little consideration to what it has to win, with our without EU?


February 19, 2018

Easing it for some bureaucrats, like with munis, does mean, de facto, making it harder for other, like entrepreneurs and SMEs

Sir, John Dizard writes “a bipartisan bank regulation reform bill that has passed a crucial Senate committee would require the entire federal regulatory apparatus to loosen the restrictions on counting munis as part of the high-quality liquid assets pool, and reduce the capital charges on holding muni positions.” “Vix horror show will not deter future suckers” February 19.

Sir, that would lead to more demand for munis, so that local bureaucrats can decide what to do with even more funds derived from debts our grandchildren will have to pay; which will naturally lead to less bank credit for those entrepreneurs and SMEs that could help our grandchildren to access jobs and revenues streams that could assist them in repaying these munis... and having a life. Great bipartisan job Senators! 


Universal Basic Income seems to be the most neutral and efficient tool to handle the unknown upheavals the use of artificial intelligence and robots will bring.

Sir, Rana Foroohar writes: “A McKinsey Global Institute report out on Wednesday shows that, while digitalisation has the potential to boost productivity and growth, it may also hold back demand if it compresses labour’s share of income and increases inequality.” “Why workers need a ‘digital New Deal’” February 19.

That sure seems to make the case for a Universal Basic Income, a Social Dividend, both from a social fairness angle and from the perspective of market efficiency.

To preempt that really unknown challenge at hand, Foroohar proposes something she names “the 25 percent solution” based on how Germany tackled an entirely different problem, the financial crisis. What it entails makes me suspect it could risk reducing the growth and productivity that could be achieved, and waste so much of the resources used to manage the consequences, so that only 25 percent, or less, of the potential benefits of having artificial intelligence and robots working for us would be obtained.

I worry sufficiently about a possible new Chinese curse of “May your grandchildren live with 3rd class robots and dumb artificial intelligence”; to also have to add “May your grandchildren have to serve the huge debt derived from technocrats defending your generation from artificial intelligence and robots.

Sir, I had more than enough of besserwissers trying to defend us and when doing so causing much more harm. Like when regulators, full of hubris, promised “We will make your bank system safer with our risk weighted capital requirements for banks”.


February 16, 2018

A Universal Basic Income must be a hateful concept for those who profit politically or economically, or both, on conditioned redistribution

When FT at long last allows for a strong defense of a Universal Basic Income Dr. Guy Standing writes: “Most believe the BI should be clawed back from the rich in tax. This is administratively easier, more equitable and efficient than targeting by means-testing. The latter has high exclusion and inclusion errors, low take-up and poverty traps, inducing bureaucrats to use intrusive behaviour tests.” “Universal basic income would enhance freedom and cut poverty

That is a very delicate way to express it, because, as the title of this comment states, there are also some very darkly motivated objections to a Universal Basic Income.


February 14, 2018

A Universal Basic Income would be a societal dividend. No one should have the power to decide which shareholders get it and which not.

Sir, in response to Ian Goldin’s “Five reasons why universal basic income is a red herring”, February 12, you today publish 3 letters that are all against the idea of Universal Basic Income. Is that really “Without Favour”?

Lesley Spencer in his “The huge cost to society of every job replaced” correctly describes some of the problems with increased automation, like humans competing disadvantageously with robots and less fiscal revenues. That clearly calls for new sources of fiscal revenues, like taxing robots or, as he writes, “the company picking up the tax shortfall when it replaces a person with a machine.”

But why that should also signify that UBI does not have an important role to play in the adjustments our society must do in order to face these chaplinesque neo modern times beats me.

And Carol Wilcox, in “Some tasks simply can’t be handed to a machine”, states that “Ian Goldin is right to call out universal basic income as snake oil”, but then supports that solely by arguing that Goldin “is wrong to believe that automation is a threat to workers”

And finally Jonathan Berry with “Why are we drawn to the most difficult solutions?”, argues for the much more complicated route of handing out stock-market participation, to some, than a societal dividend to all.

Sir, be aware that the major enemies of the UBI are the redistribution profiteers, scared to death that would diminish the value of their franchise.

But of course even between the UBI defenders there are many disagreements. I for one firmly believe that a UBI should be set at a level in which it helps you to get out of bed, but never ever, as some do, to be set on a level that allows you to stay in bed.


To base bank regulations on that ex ante perceived risks reflects the ex post possible dangers, is pure an unabridged naïve over-optimism

Sir, Martin Wolf writes “Over-optimism is the natural precursor of excessive risk-taking, asset price bubbles and then financial and economic crises.” “A bit of fear is exactly what markets need” February 14.

Indeed, and what is more a naïve “Over-optimism” than bank regulator’s risk weighted capital requirements for banks, based on ex ante perceived risks reflect the ex post possibilities?

Wolf writes of “the hope that those who manage systemically significant financial institutions remain scarred by the crisis and are managing risks more prudently than before”. Why should they? The incentives provided by the risk weighted capital requirements for banks still distort the allocation of credit. In this context “prudently” means more banks assets going to perceived, decreed or concocted safe-havens, some of which, as a consequence, are doomed to be dangerously overpopulated. 

Wolf admonishes, “If a policy [quantitative easing] designed to stabilise our economies destabilises finance, the answer has to be even more radical reform of the latter.”

I would argue that the “quantitative easing” was not correctly designed to help the economy, precisely because it ignored the regulatory distortions that impeded the economy to, by way of bank credit, use that liquidity efficiently.

Wolf correctly states “It is immoral and ultimately impossible to sacrifice the welfare of the bulk of the people in order to placate the gods of the financial markets”. But I ask, is that not what is being done by allowing banks to obtain higher expected risk adjusted returns on equity when financing the safer present, than when financing the “riskier” future our grandchildren need to be financed?

Again, I dare Martin Wolf to explain why he believes regulators are correct in wanting banks to hold more capital against what, by being perceived as risky, has been made innocous to the bank system, than against what, precisely because it is perceived as safe, is so much more dangerous?

Bank regulators have the right to be fearful, but they should fear more what is perceived safe than what is perceived risky.

PS. Here a brief aide memoire on the major mistakes with the risk weighted capital requirements


February 12, 2018

In year 2018 important issues could be dividing Poles, but Auschwitz and Poland’s treatment of Jews during World War II, around 75 years ago, should not be one of these.

Sir, I am the son of a Polish citizen who was one of the 728 prisoners that in June 1940 arrived on the first train to Auschwitz (#245 on his arm). Though I proudly carry a Polish passport, I have shamefully little knowledge of Poland. That said I am absolutely sure that if my father had heard someone defining “Auschwitz-Birkenau as a “Polish death camps”, he would have punched him. And had he heard of some few Poles not having been complicit in the pursuit of Jews, he would also have asked: “What are you smoking?”

Therefore I was very appreciative off Professor Jan Gross’ comment “Poland’s death camp law distorts history” February 6, and so I wrote to him.

But now Arkady Rzegocki’s “Poland in no way agreed to collaboration” on February 12, confuses me.

Many things could be dividing Poles in 2018, but Auschwitz and Poland’s treatment of Jews during World War II, about 75 years ago, should most definitely be one of those.

Please, for the sanity of Poland (and mine) have them both sit down and urgently resolve their differences… perhaps at an FT Lunch J


Universal Basic Income is to help you get out of bed, not to allow you stay in bed

Sir, Ian Goldin first introduces many valid reasons for why we need a Universal Basic Income. But then he writes: “As shown by the OECD, by reallocating welfare payments from targeted transfers (such as unemployment, disability or housing benefits) to a generalised transfer to everyone, the amount that goes to the most deserving is lower. Billionaires get a little more.” “Five reasons why universal basic income is a red herring” February12.

No way! I come from Venezuela. The poor their, got only a fraction, perhaps less than 15%, of what they should have gotten had only the oil revenues been shared out equally to all. Who got the most? The redistribution profiteers and their friends.

And clearly since it would reduce the value of their franchise, these profiteers are the ones who most set out to attack Universal Basic Income.

Goldin bombs UBI with:

“If UBI was set at a level to provide a modest but decent standard of living it would be unaffordable and lead to ballooning deficits”

“Delinking income and work, while rewarding people for staying at home, is what lies behind social decay.”

“UBI undermines incentives to participate”

But he also writes: “There must be more part-time work, shorter weeks, and rewards for home work, creative industries and social and individual care. Forget about UBI; to reverse rising inequality and social dislocation we need to radically change the way we think about income and work.”

And that is when I understand Goldin might not have understood where many of us want the UBI level to be. We want it set at a level that helps you to get out of bed, to reach up to the gig economy, but absolutely not at a level so high that it does allow you to stay in the bed.


February 10, 2018

Tim Harford, as an Undercover Statistician, why do you agree with the Basel Committee?

Sir, I refer to Tim Harford’s “Everything you need to know about statistics — on a postcard” February 10.

After reading it, I have one question for the Undercover Economist/Statistician, namely:

Why do you agree with the regulators’ statistics who, with their risk weighted capital requirements, opine that what is perceived as risky is more dangerous to the bank system than what is perceived as safe? Is that not crazy?


Like algorithms humans can also produce peculiar and unjust decisions, and be almost just as faceless.

Sir, Gillian Tett writes: “as institutions increasingly rely on predictive algorithms to make decisions, peculiar — and often unjust — outcomes are being produced.” “The tragic failings of faceless algorithms

Indeed, but humans are also capable of producing peculiar and unjust decisions.

What could be more peculiar than regulators wanting banks to hold more capital against what by being perceived as risky has been made innocous to the bank system, than against what, because it is perceived as safe, is so much more dangerous?

And what is more unjust than because of these regulation allowing easier financing to those who want to buy houses, than to those entrepreneurs who are looking for a possibly life changing opportunity of a credit. 

Ms Tett quotes mathematician Cathy O’Neil’s Weapons of Math Destruction with: “Ill-conceived mathematical models now micromanage the economy, from advertising to prisons,” she writes. “They’re opaque, unquestioned and unaccountable and they ‘sort’, target or optimise millions of people . . . exacerbating inequality.”

Well “opaque, unquestioned and unaccountable” that applies equally to the bank regulators who do all seem to follow late Robert McNamara’s advice of “Never answer the question that is asked of you. Answer the question that you wish had been asked of you”

And on “exacerbating inequality”, the regulators de facto decreed inequality


Loss aversion has bank regulators looking too much at the cost of the crisis, while ignoring the benefits of the whole boom-bust cycle.

Sir, Tim Harford writes: The concept of “loss aversion” developed by Daniel Kahneman and Amos Tversky…showed that we tend to find a modest loss roughly twice as painful as an equivalent gain… Those who were forced to evaluate and decide at a slow pace were… not intimidated by short-term fluctuations… less likely to witness losses.”, “The languid pleasures of slow investing” February 10.

That is precisely what happens when bank regulators go into action during a crisis; they just look at the losses, and completely ignore what good might have been achieved during the whole boom-bust credit cycle.

And that is why our regulators in the Basel Committee, panicking, imposed risk weighted capital requirements for banks, which pushes debt that relies more on existing servicing capacity, like financing “safe” houses, than debt that hopes to generate new revenue streams, like loans to “risky” entrepreneurs.

And we all know there’s little future in that!

Harford ends with: writes: “Perhaps we slow investors should adopt a mascot. I suggest the sloth” Indeed, and let us send a stuffed one to Basel.


February 09, 2018

What if all finance help provided house buyers in Canada, which increases demand, reflects 30% of current house prices?

Sir, with respect to Ben McLannahan’s extensive report on the Canadian house market February 9, “Canada’s home loans crisis”, I would just want to ask:

What if regulatory and all other support developed in order to provide house buyers in Canada easier financing, something that obviously increases the demand for houses, translates into being, let us say, 30% of the current house prices in Canada?

Who has that then benefitted, buyers or vendors?

Does this mean Canada must now help with new financing to house buyers only in order to pay for old financing help?

How could something like that not end in a disaster?


Why does the “Without Fear and Without Favour” FT, not ask bank regulators questions I have suggested for a decade?

Sir, Gillian Tett writes: “The financial world faces at least three key issues, with echoes of the past: cheap money has fuelled a rise in leverage; low rates have also fostered financial engineering; and regulators are finding it hard to keep track of the risks, partly because they are so fragmented. “The corporate debt problem refuses to recede” January 9

Sorry, it is much worse than “regulators finding it hard to keep track of the risks”. It is that regulators have no understanding of how they, with their risk weighted capital requirements for banks, have in so many ways distorted the reactions to risks.

And much more than cheap money fueling a rise in leverage, it is the bank regulators who, like with Basel II in 2004, allowed banks to leverage a mind-blowing 62.5 times with assets only because they possessed an AAA to AA rating, started it all. . 

And when it comes to financial engineering, it is the regulators who caused banks to send into early retirement many savvy loan officers, in order to replace these with skilled equity minimizer modelers, who allowed for the highest expected risk adjusted returns on equity (and the biggest bonuses). 

The regulators, by favoring what is “safe” on top of what is perceived as “safe” is usually favored, only guarantee that safe-havens will become dangerously overpopulated, against especially little capital. Great job chaps!

Why has Ms. Tett, or many other in FT, not asked regulators, for instance what I believe I the quite interesting question of: Why do you want banks to hold more capital against what, by being perceived as risky, has been made innocous to the bank system, than against what, precisely because it is perceived as safe, is so much more dangerous?

One explanation that comes to my mind is John Kenneth Galbraith’s “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”, “Money: Whence it came, where it went” (1975)

Sir, the Basel Committees’ “With the risk-weighted capital requirements we will make banks safer”… is cheap and dangerous populism hidden away in technocratic sophistications. Sadly it would seem the Financial Times has fallen for it, lock, stock and barrel.

Oops! I guess I will never be invited to a "Lunch With FT" 

February 08, 2018

What does “stored wealth” mean? Is it really redistributable, just like that, without any consequences?

Sir, Edward Luce writes: “America’s elites have stored more wealth than they can consume. This creates three problems for everyone else” “The discreet terror of the American bourgeoisie”. February 8.

What does “stored wealth” really mean? You do not hide your main-street purchase capacity in cash under a mattress; you hand it over to someone else in exchange for an asset or a service.

When some very wealthy recently bought Leonardo da Vinci’s “Salvator Mundi”, he froze, with a sort of voluntary tax, US$450 million on a wall or in a storage room. Those US$450 millions were received and used by some other wealthy or not that wealthy. Should that not have happened? Should he have used his money better? What if those who now have his money know how to put it to much better use?

The war against wealth is raging. Whenever wealth has been obtain by criminal, or by unjustified means, like monopolies or excessive intellectual property rights exploitation, that war makes sense. But, those who preach that all will be well and dandy, if only wealth is redistributed, like from the 1% to the 99%, never explain how one now converts a Salvator Mundi, into fresh main-street purchase power, and the consequences of doing so.

We could assume that much of that lack of explanation is because many of the wealth redistribution fighters are in fact redistribution profiteers interested in increasing the value of their franchise.

PS. Not long ago, visiting the Museum of Louvre, it dawned on me that most of what was exhibited there would not have come into being, were it not for the existence of the filthy rich. Can we really afford, do we really want, to live without them?


Should a sanctioned bank like Wells Fargo be allowed to immediately advertise itself as a do-gooder?

Sir, with respect to the recently sanctioned Wells Fargo we can observe that, in order to clean its name, it has now launched, as is typical in similar circumstances, advertising campaigns highlighting its social responsibilities. Should it really be allowed to do so?

Even though Wells Fargo should of course try to do its utmost to compensate their recent bad behavior, I believe it should not be able to advertise itself out of a bad image, for at least two years. A prohibition of that sort would also serve as a great deterrent to others.

And, while being on the subject of modernizing sentences, as a Venezuelan I ask, could the sanctions of those that commit crimes against humanity but have not yet been captured include blocking their presence in social media forever, and perhaps also that of all their immediate families for at least some years?

Of course those criminals could use false names, but who would like to take a (face-recognizable) selfie doing so?


February 07, 2018

We humans search for risk-adjusted yields. So did banks, but they now search for risk-adjusted yields adjusted to allowed leverage

Sir, let me comment on three paragraphs in John Plender’s “The global economy looks solid but there are worrying signs” February 7.

First: “there are grounds for concern about a credit cycle in which risk is clearly being mispriced. This is partly a product of the enduring search for yield. When almost every asset class looks expensive, investors tend to respond by taking on more risk”

Ever since risk weighted capital requirements were introduced, banks do not more search for yield, but instead search for yield adjusted by allowed leverage, and so risk has been mispriced.

Second: “A further hint of a return to normality is the reappearance of volatility after a long period in which it has been conspicuously absent — helpful if you worry that low volatility encourages complacency and makes the financial system more vulnerable to crises.”

And why should we not there worry, in precisely the same way, that what is perceived as safe encourages complacency and makes the financial system more vulnerable to crises?

Third: “Applying a higher discount rate to the liabilities while enjoying an uplift in the value of the assets is the answer in today’s low interest world to the pension fund manager’s prayer.”

The so many times repeated opinion that all pension funds should be able to obtain a real return of 5 to 7% annually, is one of the most harmful financial misinformation ever.


What if prejudices in India had caused banks having to hold more capital when lending to women than when lending to men?

Sir, Martin Wolf, discussing India’s prospects mentions the “striking structural feature of India, whose significance goes far beyond economics, is social preference for sons.”, “Modi’s India is on course for rapid growth” February 7.

But the western world, by means of their bank regulators, also imposed on India that nutty preference for what is perceived as safe over what is perceived as risky. And that, for a developing country, given as risk taking is the oxygen of any development, is bloody murderous; as I have insisted on during the last two decades, in statements at the World Bank, in statements at the UN republished by an Indian university, in hundreds of Op-Ed and articles, and in innumerable letters to FT and to Martin Wolf.

Before these distorting regulations, banks invested in assets based on their risk adjusted yields; after, they now also adjust for the allowed leverages in order to maximize their returns on equity. That means overpopulating “safe”-havens and under exploring those “risky” bays, like entrepreneurs and SMEs, which all countries need to be explored if they are going to develop, or keep their development from regressing.

To think that what is perceived as safe (cars) is more dangerous to our bank systems than what is perceived as risky (motorcycles), only reminds me of that mutual admiration club of besserwisser experts that defended geocentricity… and of Martin Wolf as one of the inquisitors.


We would all benefit from algorithms tempering our bank regulators’ human judgments.

Sir, Sarah O’Connor, discussing the use of algorithms when for instance evaluating personnel writes: “The call centre worker told me the software gives lower scores to workers with strong accents because it doesn’t always understand them.”, “Management by numbers from algorithmic overlords” February 7.

What, should we assume that the capacity of someone in a call center being understood would not be one of the most important factors considered by a human evaluator?

And when O’Connor refers to “the subtle flexibility of human judgment; decisions tempered by empathy or common sense; the simple ability to sort a problem out by sitting down across a table and talking about it.”, I must state that is absolutely not what happens all the time.

Any reasonable algorithm, with access to good historical data, would never ever have concluded, as the human Basel Committee did, that what is perceived as risky is more dangerous to our bank systems than what is ex ante perceived as safe.

PS. Could we envision a world in which more predictable algorithms managed our wives reactions… and, if so, would we then not miss their lovable unpredictability?


February 06, 2018

Risk weighted capital requirements for banks guarantee banks will have the least capital when the worst crises occur

Sir, Jim Brunsden and Cat Rutter Pooley write that Mario Draghi “said that speedy work was needed to conclude talks on an overhaul of bank rules that had been under discussion for more than a year. The reforms would introduce the latest international standards aimed at making the financial system more resilient to crises”, “Draghi warns banks of Brexit ‘frictions’” February 6.

Sir, again, for the umpteenth time, the price of being “More resilient to crises” in the way current regulators propose, is only to be more exposed when crises happen? This is because the risk weighted capital requirements for banks that still, quite surrealistically, form part of regulations, by giving banks incentives to stay away from what is perceived as risky, might reduce the number of crisis, but that at the price of banks having especially little capital, right when the worst crises happen, namely those that result from something ex ante perceived, decreed or concocter as very safe turn out ex post to be very risky.

Sir, again, for the umpteenth time, your banking systems are in hands of regulators who cannot answer: “Why do you want banks to hold more capital against what’s been made innocous when perceived as risky, than against what’s dangerous because it’s perceived as safe? Does this not set the world up for slow growth and too-big-to-manage crises?”

But, then again, “Without fear and without favour” FT does not dare ask regulators those questions either.

PS. Brunsden and Cat Rutter Pooley also write that “Michel Barnier, EU chief negotiator visiting London, that “the time has come” for Britain to make a choice about what kind of future relationship it wants.” Does Barnier, know what future relation the EU wants with Britain after Brexit, or is it that he thinks he speaks for all Europe?


In order to achieve any real economic and financial normalisation the regulatory distortion of bank credit must be eliminated.

Sir, Mohamed El-Erian holds that: “the move up in US interest rates has attracted lots of attention. It’s been blamed for a violent sell-off in stocks, and fuelled warnings not just of an end to the bull market in bonds but, perhaps, also equities. That, in turn, can engender concerns about the housing market, corporate funding, financial stability and economic growth. Yet the causes behind the rise in bond yields suggest that this is more likely to be part of a larger — and healthier — economic and financial normalisation.” “Don’t forget the good news behind higher bond yields” February 6

Let me be absolutely clear, before the credit distorting and danger enhancing risk weighted capital requirements for banks are eliminated, and the difficult and very delicate task of recapitalizing these completed, there will be no real economic and financial normalization.


February 05, 2018

Banks now invest based on the risk-adjusted yields of assets adjusted for allowed leverages; that distorts the allocation of credit to the real economy.

Sir, Lawrence Summers, when writing about the challenges Jay Powell will face as Fed chairman mentions “Even with very low interest rates, the normal level of private saving consistently and substantially exceeds the normal level of private investment in the US” “Powell’s challenge at the Fed” February 5.

Not too long ago, markets, banks included, invested based on the risk adjusted yields they perceived the assets were offering. Some more sophisticated investors also looked to maximize the risk adjusted yield of their whole portfolio.

But, then in 1988 with Basel I, and especially in 2004 with Basel II, the regulators introduced risk based capital requirements for banks. As a consequence, banks now invest based on the risk-adjusted yields adjusted for the leverage allowed that they perceive the assets offer. As banks are allowed to leverage more with safe assets, which helps to increase their expected return on equity, they now invest more than usual, and at lower rates than usual, in “safe” assets like loans to sovereigns, AAA rated and mortgages. And of course, banks also invest less than usual, and at even higher rates than usual, in loans to the “risky” like entrepreneurs and SMEs.

That has helped to push the “risk free” down, and also explains much of the lowering of the neutral rate. Since the regulators now de facto block the channel of banks to the “risky” part of the economy, there is a lot of private investment that simply is not taking place any longer.

It is sad and worrisome that neither the leaving Fed chairman, Janet Yellen, nor the arriving one, Jay Powell (nor Professor Summers for that matter) can apparently give a clear direct and coherent answer to the very straight forward questions of: “Why do regulators want banks to hold more capital against what’s been made innocous by being perceived as risky, than against what’s dangerous because it’s perceived as safe? Does that not set us up for slow growth and too-big-to-manage crises?


February 04, 2018

Jan Zielonka, yes, the ‘enlightened’ and not accountable to anyone besserwisser ‘experts’, are taking our world order down.

Martin Wolf writes that Jan Zielonka, in “Counter-Revolution”, holds that “liberal democracy and neo-liberal economics, migration and a multicultural society, historical ‘truths’ and political correctness, moderate political parties and mainstream media, cultural tolerance and religious neutrality…is under attack” and that he “is particularly critical of the EU, a “prototype of a non-majoritarian institution led by ‘enlightened’ experts”. “Project backlash”, February 3.

“Enlightened experts”? Absolutely! In 1988, without any real meaningful consultations, without thinking about the purpose of the banks, and without thinking thru its possible consequences, G10’s central bankers and regulators introduced risk weighted capital requirements for banks.

The Basel Committee then favored the sovereign with the outrageously statist risk weight of 0%; and, in 2004, the AAArisktocracy with 20% and the financing of residential houses with 35%; while disfavoring loans to unrated citizens, SMEs and entrepreneurs with a 100% risk weight.

Did those regulators ever explain why they should want to favor with lower capital requirements for banks that which is already favored by being perceived as safe, and thereby discriminate against that which is already disfavored by being perceived as risky? No. They are such besserwissers they don’t even hear the question.

These regulations seriously distorted the allocation of bank credit to the real economy by stimulating the banks to finance much more the “safer” present consumption than the future “riskier” production… something that truly constitutes a shameful intergenerational treason.

Besides a slowing economy, the only thing the risk weighting guarantees is that when banks systems really find themselves in trouble, which is when something perceived as very safe turns out to be very risky, banks will stand there with especially little capital. Brilliant eh?

Martin Wolf ends with “We can see the crisis of liberal democracy most clearly in the fact that so ardent, yet disappointed, a proponent offers not much more.”

Mr. Wolf what about your duty of “without fear and without favor” using your throne of influence to force the Basel Committee regulators to answer the questions that I have posed in thousand of letter to FT, and mostly to you?

Per Kurowski

January 31, 2018

If you want your sovereigns to have easier access to credit than your entrepreneurs, then you are not thinking on your grandchildren.

Sir, with respect to sovereign bond-backed securities you opine “bank regulation should be reformed to treat SBBS as favourably as national bonds in capital requirements — indeed, more favourably, since SBBS would make it less destabilising to have banks hold equity against concentrations of their own government’s bonds” “A rare chance to create a pan-eurozone safe asset” January 31.

What? Instead of a 0% risk weighting, these bonds collateralized with loans to sovereigns, should now have even a minus something risk weight percentage? So that banks can earn even higher expected returns on equity when lending to sovereigns? So that banks will lend even less to entrepreneurs. Sir, as a grandfather, let me tell you, that is a shameful proposition.

Defending the SBBS you argue: “the monetary union enjoys a well-deserved streak of growth”. Holy moly, what “well-deserved streak of growth” is that? Do you refer to that growth that has been financed by quantitative easing and by the low interest rates that makes it impossible for pension funds to live up to its offers? Come on! It is a totally undeserved growth… and one that will be very hard to repay.

You opine one should “create a truly pan-eurozone benchmark safe asset… the SBBS”

Sir, when you save, by investing in a bond, you should want the debtor invest your money well, so as to be able to repay you well. A eurozone SBBS seems here to be a bond designed so that no sovereign would have to repay it, and therefore no sovereign would be required to invest it well. Would you like your pension fund to invest in such SBBS with ultra low interest rates? 

And you also opine that “if issued in sufficient quantities, SBBS could help end the danger at the heart of the eurozone crisis: the “doom loop” between sovereign and bank debt. Banks holding senior SBBS would be safe from sovereign risk”

Sir, again, for the umpteenth time, that “doom loop” was created, in 1988, when regulators in their risk weighted capital requirements for bank assigned the sovereign a risk weight of 0% and the unrated citizens, those who form the backbone of any sovereign, a risk weight of 100%. And then I believe you said nothing about that!