December 30, 2017

Sadly, banks must now to take on board rules that were not adjusted to what caused the crisis

Sir, Martin Arnold, your Banking Editor writes: “In the coming year, much of the alphabet soup of post-crisis financial regulation will be completed — including Basel III, IFRS 9 and Mifid II — giving the industry the most clarity for almost a decade on the rule book it must follow.” “Lenders take on board rules of a post-crisis world” December 30.

We are soon three decades after regulators in 1988 with Basel I, concocted risk weighted capital requirements for banks, and 13 years after they put these on steroids with Basel II’s risk weights of 0% for sovereigns, 20% for AAA rated, and 35% for residential mortgages. That caused irresistible temptations for banks to create excessive exposures to these “safe” assets, which resulted in the 2007/08 crisis. And yet there is almost no discussion about that monstrous regulatory mistake.

So the risk weighting is still part of the regulations; and therefore the 0% risk weighted bank exposures to sovereings keeps growing and growing; as well as is the disortion of bank credit in favor of the “safer” present and against the “riskier” future. 

In this respect if I were to title something of this sort at this moment it would be more in line of “Lenders take on board rules that have not been adjusted to the crisis and therefore guarantee a world with even larger bank crises”

The irresponsibility and lack of transparency evidenced by the members of the Basel Committee is amazing. The lack willingness of media, like the Financial Times, to pose some simple questions to these regulators, is just as incomprehensible. 

When the next bank crisis, or the next excessive exposure to something perceived as very safe blows up in our face, how will your bank editor then explain his silence on this?

PS. I could not find the link to Martin Arnold's piece.

@PerKurowski

To apply the Socratic method successfully requires students to be somewhat interested in the questions.

Sir, with respect to Lucy Kellaway’s "End of Term Diary” (December 23), David Parker writes: “It’s the teacher’s job to facilitate and motivate. Show students the beauty of things. And, teach by the Socratic method. Ask a question. If the student doesn’t understand, ask another question. Keeping asking. When they understand, they’ve learned” “Teach by the Socratic method — keep asking” December 30.

I have tried to apply the Socratic method during years trying to make Financial Times understand the mistakes of risk weighted capital requirements for banks. Among the questions:

Why do regulators require banks to hold more capital against what has been made innocous by being perceived as risky, than against what has become dangerous by being perceived as very safe?

Why did regulators not define the purpose of banks before regulating these?

Why did bankers use as input for their risk weighted capital requirements for banks the intrinsic risks of bank assets and not the risk of those assets for the banks?

Why do regulators not understand that allowing banks to leverage differently with different assets will distort the allocation of bank credit? And, if they understood that, who gave them the right to distort? Etc. 

But FT shows no interest in these questions… so I have to find another method… any idea Lucy Kellaway?

@PerKurowski

Current risk weighted capital requirements for banks are a stand out example of “garbage in garbage out”

Sir, when discussing artificial intelligence and “how much power should be ceded to the machines” you mention: First. “the need to overcome limitations in machine learning techniques”; Second. “garbage in, garbage out…the need for better quality control”; and Third. “the need to develop a clear and transparent governance structure for AI”, “The paradox in ceding powers of decision to AI” December 30.

Sir, human intelligence is quite often in need of all that too.

When bank regulators used intrinsic risks of bank assets as inputs for developing their risk weighted capital requirement, they could not produce anything but garbage out. What they should have used is unexpected events or the risk those assets could pose to our bank system, namely the risk that bankers would not be able to adequately manage perceived risks.

And little evidences the need for a transparent governance structure for human intelligence too, as current regulators refusal to answer the very basic questions: “Why do you require banks to hold more capital against assets made innocous by being perceived as risky than against assets becoming dangerous by being perceived as safe?”.

Humans must also also overcome some technical limitations: An Explanatory Note by the Basel Committee on the Basel II IRB (internal ratings-based) Risk Weight Functions” expresses: “The model [is] portfolio invariant and so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.”

And the explicit reason for that mindboggling simplification is: “This characteristic has been deemed vital in order to make the new IRB framework applicable to a wider range of countries and institutions. Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

Sir, finally, I would add a fourth requirement, namely to make sure artificial intelligence is kept free from that excessive hubris and besserwisserism that too often affect humans. Like that which kept regulators from even having to define the purpose or banks before regulating these,

@PerKurowski

December 29, 2017

Favoring government borrowings with quantitative easing and statist capital requirements for banks, dooms the sovereign to default.

Sir, Michael Hasenstab writes about how as a result of the US Federal Reserve’s “$3.6tn Federal reserve money-printing exercise [that] has financed approximately 20 per cent of the government’s net borrowing per year since 2008…and cutting interest rates to record lows” has distorted “the price of money, along with key metrics for valuing both financial and real investments” “Fed risks a sizeable hangover as it begins ‘the great unwind’” December 29.

Correct, but to really understand the magnitude of the distortions, we also must include those produced by the risk weighted capital requirements for banks... like the 0% risk weighting of sovereigns.

Allowing banks to hold different levels of capital against different assets means the risk-adjusted returns on bank equity are not solely cleared by markets but also by regulations. If one now decides that was a truly bad idea that dangerously distorts the allocation of credit to the real economy…how do you work yourself out of this hole?

For a starter, let us suppose you shoot for banks having to maintain 10% in capital against all assets, including sovereign then: how much additional capital need banks to have, or how much sovereign assets need banks to shed from their balance sheets? Either figure is bound to be mindboggling.

To be able to do so without freezing up the whole bank credit machinery, would perhaps require settling an important part of all bank credits, with some unredeemable negotiable bank shares.

Upsetting? No doubt, but the real costs of keeping going down that pro sovereign distorted route is domed to be filled with sovereign defaults.

Hasenstab begins with “In response to the global financial crisis, the US Federal Reserve took extreme but necessary measures to protect the American economy from collapse.” That is the conventional truth, I am not sure it is the whole truth and nothing but the truth. Sir, in August 2006 you published a letter I wrote titled “Long-term benefits of a hard landing” It would have hurt, not doubt, but I sincerely believe we would all have been breathing easier now had not the Fed protected the American and the world economy so much… and of course regulators having corrected what brought us that crisis to begin with… namely the so credit allocation distorting risk weighted capital requirements for banks.

@PerKurowski

Financial liberalism died when the Basel Committee establishment concocted the risk weighted capital requirements for banks

Sir, Joe Zammit-Lucia writes: “True liberals have always understood the need for continual reform as stagnating systems inevitably get progressively captured by powerful interests. Liberalism dies when it becomes the Establishment, itself captured by vested interests and an apologia for the status quo” “True liberals understand the need for reform” December 29.

What better example of that than when the regulatory establishment, gathered in the mutual admiration club of the Basel Committee decided to protect with lower capital requirements for banks the lending to the safer status quo than any lending to a riskier future.

Bankers loved it, because that allowed them to fulfill their wet dreams of being able to achieve the highest risk adjusted returns on equity on what is perceived as safe; and lower capital requirements naturally opened up much more space for their own bonuses.

Regulators, dumb enough to take ex ante perceived risks to represent real ex post dangers love it, because they think they are making banks safer.

And the world stagnates because of that risk aversion, and turns statist as regulators risk-weighted sovereigns with a 0%, thereby subsidizing public borrowings.


@PerKurowski

What if we in writing had to authorize phone companies to listen to our calls, in order to have access to phones?

Brooke Masters writes: “when I link our Amazon Echo speaker to my son’s Spotify account, I have no idea whether I am violating one of the thousands of terms and conditions he agreed to with his account. Furthermore, does that act give Amazon the right to send him advertisements based on the songs we play?” “Take ownership of the sharing economy” December 29.

She is absolutely right. The rights we seem to have to give up in order to gain access to social media and alike, though defined in small letters in thousands of unreadable pages, is one of the most undefined issues of our time.

Some questions:

Should the marginal cost for social media owners to access, and waste, so much of our limited attention span, be zero?

Should we be able to copyright our own preferences so that we at least can have something to negotiate with?

How much can we allow being distracted during working hours before our employer has the right to deduct our salaries paid?

How will such working hours distractions be accounted for in employment statistics?

How is all this free or very cheap consumption paid by used attention spans be accounted for, for instance in GNP figures?

Should social media owners be allowed to impose their own rules or should that not be subject to some kind of a special arbitration panel?

How our global differences be managed? Does a government that interferes with its citizens’ rights of access to social media have access to other web sites of other nations?

@PerKurowski

December 27, 2017

Bank regulators, imposing irresponsible insane rules, are prime destroyers of the rational liberal rules-based world order

Sir, Martin Sandbu writes of “opponents of the liberal, rules-based world order built up over 70 years” and that “The anti-liberal front’s undisputed leader, is the US under President Trump”, “The battles of ideology for our age”, December 27.

Sir, forget it, whatever President Trump might have done until now with respect to breaking down a rules-based world order, is nothing when compared to the damage bank regulators have done when trying to impose their own petit committee concocted regulatory rules on the world.

What they did, namely to allow banks to leverage more with assets perceived as safe than with assets perceived as risky; something which allows banks to earn higher risk adjusted returns on equity on assets perceived as safe, is something absolutely irresponsibly insane.

First, because that distorts the allocation of bank credit with serious consequences for the real economy, like favoring “safe” financing of houses over “risky” financing of “risky” entrepreneurs; which results in many basements for the young to live with their parents but few jobs for them to afford their own upstairs.

Second, by decreeing the risk-weight of the sovereign to be 0%, while that of the citizens on which that sovereign depends were weighted 100%, they effectively, 1988, one year before the fall of the Berlin wall, introduced through the backdoor, a mechanism to provide the financing to sustain (for some time) runaway statism.

Third, because since major bank crisis never ever result from excessive exposures to what was ex ante perceived as risky, it all serves absolutely no stability purpose at all.

Sir, if the “liberal internationalist camp working to defend a multilateral system of collaborative rules-based governance for economic openness to mutual advantage” is to go anywhere, that must begin by forcing bank regulators to satisfactorily respond the very straightforward question of: Why do you require banks to hold more capital against what has been made innocous by being perceived as risky than against what’s made dangerous by being perceived as safe?

Sandbu correctly argues: “In a global battle of ideas, liberals must show urgently that the existing order can be made to work for everyone”. But, injecting quantitative easing liquidity and low interest assistance, while such distorting regulations are in place, guarantees these will not be made to work for everyone, but only for those already in possession of safe assets, like the parents’ houses.

@PerKurowski

December 26, 2017

The distraction factor forces us to redefine entirely our concepts of working hours and real salaries

Sir, I refer to Sarah O’Connor discussion of “bureaucratic limits on working hours” “Symbolic victories over Brussels will not help Britain’s workers”, December 27.

But, when we read in Bank of England’s BankUnderground blog that “we check our phones 150 times per day, or roughly once every 6½ mins; and that the average smartphone user spends around 2½ hours each day on his or her phone; and that we are distracted nearly 50% of the time,” then of course we have reasons to suspect that all our usual thinking about working hours, or even about real salaries, have entered into a completely new dimension and are up for major revisions.

Sir, never ever did we chat around the coffee machine that much in our days… or did you?

December 24, 2017

Many children incapable of helping their parents during their old days will one day rightly blame our bank regulators’ insane risk aversion for that

Sir, Bronwen Maddox writes about the possible need to “force more people to use the equity in their houses to pay for care” and that “In these discussions, how to tax inheritance has attracted more political attention, not least because the prescriptions are simpler and chime with the debate about inequality”, “An ageing population and the end of inheritance” December 23.

Are the prescriptions for taxing inheritance really simpler than using your assets to pay for some of your own services? I don’t think so. To pay for your own social care services with assets of your own, fits perfectly with the standard norms and realities of our economy and our society. But, eroding the right to bequeath wealth to your children constitutes a direct attack on one of the most important drivers of the economy that could have dangerous consequences for all.

One of the least studied, or clearer yet conveniently ignored topics, is what could happen if you redistribute wealth, be it by wealth or inheritance taxes; not only in terms of what I consider is its very limited potential to provide temporal relief to poverty or inequality, but also in terms of how it could negatively affect the future economy. The lack of such discussions on this has possibly to do with not fitting the agenda of those creating envy and hate in order to achieve their own particular small and temporary goals.

Let me briefly hint at the following:

If a $450 million Leonardo Da Vinci “Salvator Mundi” had to be sold at the death of his owner to pay for all inheritance taxes it will not fetch $450 million. This because who would feel stimulated to pay a sort of voluntary tax, freezing that amount of purchase power on a wall or in a storage room, if that painting cannot be bequeathed to heirs, and just be taken away upon death?

And what would happen to all private owned houses and apartments, if upon the death of their owners who made sacrifices paying for these, they would just fall into a government pool of houses, with their users to be nominated by some few house redistributionists? What would happen to the incentives to save in order to buy, maintain and make homes beautiful?

And, if all shares and bonds were taxed to be placed in a mutual government pot… would that not signify heaven for statism fanatics and redistribution profiteers, and hell for all the rest of our children and grandchildren?

Sir, of course “the dream of bequeathing assets to the next generation is fading in the face of social care costs” that results from having more elder and fewer younger. But the lesser earnings of the young also cause that fading. Those regulators who with their insane capital requirements had banks abandoning financing the “risky” future, in favor of refinancing the “safer” past and present, will not be kindly remembered by the too many children incapable to take care of their parents’ old days.

PS. What is a reverse mortgage but a way to squeeze the most out of the present for the present? Whether it is done to satisfy an urgent need or only in order to anticipate some unnecessary consumption is not something irrelevant.

@PerKurowski

December 23, 2017

Imposing on banks risk aversion more suitable to older than younger, regulators violated Edmund Burke’s holy intergenerational social contract

Vanessa Houlder when writing about Richard Thaler’s ‘nudge’ theory and how our hatred of losses affects risk taking mentions: “Investing in a portfolio tilted towards equities makes sense for the young, although — given that share prices can drop dramatically — the proportion should be reduced as people near retirement, according to Thaler.” “Be lazy, the first rule of investing” December 23.

Sir, that refers precisely to something on which I have written to you hundred of letters over the years.

Regulators, with their risk-weighted capital requirements, by allowing banks to hold less capital against what is perceived as “safe”, like mortgages, than against what is perceived as “risky”, like loans to entrepreneurs, they allow banks to earn higher risk adjusted returns on what’s perceived safe than on what’s perceived risky.

With it regulators top up the natural risk aversion of bankers with their own one, and by there doom banks to primarily work in the interest of the older and against those of the young. That, phrased in Edmund Burke’s terms, is a shameful breach of the holy intergenerational social contract that should guide our lives. How our society has managed to turn a blind eye on this makes me, a grandfather, very disappointed and sad.

But all that risk aversion is also so totally useless. Major bank crisis never ever result from excessive exposures to what has ex ante been perceived as risky; but always because of unexpected events or excessive exposures to what was perceived, decreed or concocted as safe but then turned out to be risky, like AAA rated securities backed by mortgages awarded to the subprime sector and loans to sovereigns like Greece.

PS. It would be great if Vanessa Houlder could ask Richard Thaler why he thinks regulators want banks to hold more capital against what perceived as risky is made innocous than against what is perceived as safe is therefore intrinsically more dangerous? My own explanation is that they mistook the ex ante perceived risk of bank assets for being the ex post risks for banks.

@PerKurowski

December 22, 2017

Ex ante expected real rates of return and ex post real rates of return are apples and oranges

Gillian Tett referring to “The Rate of Return on Everything, 1870-2015” authored by Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick and Alan Taylor writes: “real rates are very low today compared with the peacetime years in the 20th century. But real returns on bonds and bills were much lower during the first and second world wars, tumbling to about minus 4 per cent (compared with 3 per cent for bonds in 2015, and zero for bills).” "Take the very long view on asset prices", December 22.

Sir, we cannot know the ex post real rates of return for bonds yet, and it must be very hard to gauge the ex ante expected real rates of return during the first and second world. Therefore it is not clear to me whether Ms. Tett refers in both cases to ex ante expected real rates or to ex post finally obtained real rates? If not she is comparing apples to oranges. Frankly, no matter how high patriotic willingness to contribute with war efforts could stimulate lending to it, I truly doubt investors accepted ex ante a minus 4 per cent real rate offer… so they must have expected a much lower inflation rate.

Sir, there is a lot of confusing ex post with ex ante going on. For instance, the Basel Committee regulators, when setting their risk weighted capital requirements for banks, used the ex ante perceived risk of bank assets as proxies for the ex post risks to banks… a horrible mistake that distorted the allocation of bank credit and that has not been corrected during soon 30 years.

PS. And now having read the paper I must also observe that risk free rates, and rates of returns on what is considered by regulators a safe assets, like houses, must be separated into those before the risk weighted capital requirement for banks and those thereafter, since the regulatory subsidy to the “safe” again makes apples and oranges of these.

@PerKurowski

December 20, 2017

Major bank crisis, are they most likely to result from excessive exposures to what’s perceived risky than for what’s perceived safe?

Izabella Kaminska ends her fun “Festive inefficiencies would be missed in Big Tech’s perfect world” of December 20 with “Since inefficiency has a way of popping up no matter what we do, it is human experience that should be prioritised before all else.”

Sir, let me phrase some questions:

How long could it take for a bank system to suffer a major crisis because of excessive exposures to what is perceived risky?

How long could it take for a bank system to suffer a major crisis because of excessive exposures to what is perceived safe?

Do our bank regulators care at all about human experiences when they require banks to hold more capital against what is perceived as risky than for what is perceived as safe?

Sir, do you really care about what human experiences teaches us?

@PerKurowski

Here are some actions we should take in order to reduce the threat inequality poses to our democracies.

Sir, the discussions about growing inequality, that tend too often to concentrate on either income or wealth inequality expressed solely as a linear function of monetary terms, are dangerously simplified. Once some basic and non-basic wants have been met, loading up some extra millions does not produce the same amount of marginal benefits per dollar.

But of course for those who do not have the income to satisfy their needs and basic wants inequality matters, a lot. And so more important than worrying about inequality, is to worry about how increase the incomes of those earning less. 

Sometimes the lower incomes for some can have to do with some few other earning unjustifiably or even incorrectly too much, but most often it has little to do with that.

But the redistribution profiteers want to hear nothing of that sort. They prefer to feed envy, with for instance their so frequent mentions of how few wealthy posses more wealth than a billion or so of the poor. That of course can only increase the threat inequality signifies to our democracies that Martin Wolf lays out well in his “Inequality is a threat to our democracies” December 20.

Going from “a stable plutocracy, which manages to keep the mass of the people divided and docile” to the “emergence of a dictator, who rides to power on the back of a faux opposition to just such elites” is what sadly happened in my Venezuela.

What can we do?

When Wolf writes “The market value of the work of relatively unskilled people in high-income countries seems very unlikely to rise” we could for instance see what role risk weighted capital requirements for banks play:

In terms of equality what’s the difference between someone owning a home and someone renting a similar one?

Not much, that is unless the value of the house owned increased a lot and, as a consequence, rents also increase, sometimes more than what the renter can compensate with increased salaries.

That’s what happens when banks are allowed to hold residential mortgages against much less capital than when for instance lending to entrepreneurs; and as a consequence earn higher risk adjusted returns on equity with mortgages than when financing entrepreneurs; which mean banks will make the financing of house purchase abnormally available; which means house prices will go up… until

That is also what happens when central banks inject liquidity that benefits mainly the owner of assets; “now your house is worth more so take out a new loan against it” is not an offer that one renting will hear. 

When Wolf refers to “a desire to enjoy some degree of social harmony and the material abundance of modern economies, [being a] reasons to believe the wealthy might be prepared to share their abundance.” We should be careful of promising more than what could be obtained, because much of that abundance is not easily converted into effective purchase power or transferable income to others; for instance when some wealthy, by means of what could classify as a voluntary tax, decides to freeze on a wall, or in a storage room $450m of his purchase power, in a Leonardo Da Vinci “Salvator Mundi” how do you efficiently reverse that? Of course what’s important here is not the buyer’s paid $450 million but to where the $450million received are going.

Sir, I believe the following actions would go a long way to “ensure the survival of liberal democracy”


2. A monthly Universal Basic Income (UBI) that is sufficient to help you get out of bed but not so large as to permit you to stay in bed. 

3. A Revenue Neutral Carbon Tax that helps fund the UBI and aligns the incentives for saving the environment and reducing inequality. 


5. Have Facebook, Google and alike pay a minimum fee into the UBI fund for any advertising that they send to us on the web. That would also help us to make sure they do not waste so much of our very scarce attention span.

@PerKurowski

December 19, 2017

Our best hope for a decent and affordable adult social care must be minimizing the intermediaries’ takes, whether these are private or public

Sir, Diane Coyle when discussing the possibilities and need for organizing for instance adult social care, and thereto taking advantage of new methods to connect demand and supply and as exemplified by Uber, expresses concern for “the treatment and status of workers in platform public services (although it is not as if these are high-status jobs at present)” “Algorithms can deliver public services, too” December 19.

What’s missing though in that good analysis, is not having contemplating additional tech advances. For example Uber wants to buy self driven cars, in order to get the complications of human drives out of their way, but without realizing that consumers might at one point take direct contact with those cars, in order to get Uber out of the way.

The same will happen for workers in public services, though of course the increased demand for adult social care should help to keep up the demand for many of them. But, even in this case who knows? If you think of yourself as an older person soiled with your own feces, what’s currently is delicate referred to as an “accident”, who would you feel most comfortable with cleaning you, a not too human 1st class robot or a human? 

Sir, the way our generation, and governments have gone on a debt binge, to anticipate current consumption, there will come a time for a reckoning. If we do not find ways to minimize the intermediaries’ take, we will not afford the basic services we need and want.

Of course intermediaries are workers too… and that is why even for them we need to create decent and worthy unemployments.

@PerKurowski

December 18, 2017

When banks can leverage more their equity financing “safe” built houses than financing “risky” job creation, too many young are doomed to live unemployed in our basements

Sir, Bill Mendenhall in a letter of December 18, “Lord Turner got there first on productive credit” mentions a report by Jim Pickard “Labour looks at making mortgage lending harder for banks” December 12. Pickard’s report was not in FT’s US edition.

Pickard wrote: “Shadow chancellor John McDonnell is considering making mortgage lending more onerous for banks in an effort to push them to lend more to smaller companies…The proposals were set out in “Financing Investment”, a report commissioned by the Labour leadership and written by GFC Economics.

According to GFC, British banks are “diverting resources” away from vital industries and instead focusing on unproductive lending, such as consumer credit borrowing.

The paper argues that the Prudential Regulation Authority, the BoE’s City regulator, should use existing powers to make banks hold relatively more capital against their mortgage lending. The report’s authors say this would be an “incentive to boost SME lending growth”.

The GFC report also claims that the BoE’s Financial Policy Committee “makes no distinction between unproductive and productive lending” to companies, arguing that the banking sector “should be geared towards stimulating productive investment”.

The report calls for the FPC to use existing powers to vary the risk weights on banks’ exposures to residential property, commercial property and other segments of the economy.

The report acknowledges that such interventions would be seen by critics as risky measures that could “impede the smooth functioning of markets” and distort the efficient allocation of capital. But it warns that “financial stability risks will emerge if an economy loses its competitiveness”.

Sir, you must be aware that this includes much of what I have written to you in thousands of letters, for more than a decades, and that you have decided to ignore.

But, if that report acknowledges that “to vary the risk weights on banks’ exposures to residential property, commercial property and other segments of the economy… would be seen by critics as risky measures that could ‘impede the smooth functioning of markets’’, why does it not then question the distortion the current existing differences in risk weights cause?

Pickard also mentions that the report warn that “financial stability risks will emerge if an economy loses its competitiveness”. No doubt! Banks cannot be the sole triumphant survivors in an economy that is losing strength.

And when now Mendenhall writes that “Lord Turner got there first on productive credit” because in his 2015 book Between Debt and the Devil he pointed out that “the banking sector’s decades-long switch away from lending to businesses towards mortgage lending only serves to inflate asset prices, which leads to property bubbles”, that does not mean that Lord Turner really understood or understands what has happened.

In June 2010, during a conference at the Brooking Institute in Washington DC, I asked Lord Turner “Do you really think the banks will perform better their societal capital allocation role if regulators allow them to have much lower capital requirements when lending to the consolidated sectors than when lending to the developing?

To that Lord Turner (partially) responded: "we try to develop risk weights which are truly related to the underlying risks. And the fact is that on the whole lending to small and medium enterprises does show up as having both a higher expected loss but also a greater variance of loss. And, of course, capital is there to absorb unexpected loss or either variance of loss rather than the expected loss.”

Pure BS! With that Lord Turner evidences he ignores that banks already clear for the higher risks when lending, so that when also clearing for it in the capital, the whole credit allocation process gets distorted… and banks end up lending more to build “safe” downstairs for our children to live in with their parents, and lending less to “risky” entrepreneurs who could get them the jobs to afford buying their own “upstairs” 

No, Lord Turner is just one of those too many regulators that want banks to hold the most capital against what is perceived as risky, while in fact it is when something perceived as safe turns out to be risky, that we would most like that to be the case.

@PerKurowski

December 16, 2017

How long will regulators believe that unrated entrepreneurs pose more danger to banks than investment graded companies?

Sir, Brooke Masters writes that “a group of banks collectively lent €1.6bn to a South African billionaire. At the time, these “margin loans” looked like really safe bets because the lending was secured by 628m Steinhoff shares worth €3.2bn and the company had an investment-grade rating” and now they “were sitting on paper losses of €1.2bn” “Beware of top execs who depend on share-backed loans”, December 16.

Sir, this just another evidence of that what is really dangerous for banks is not what is perceived risky but what could erroneously be perceived as safe. And therefore that the current risk weighted capital requirements for banks makes absolutely no sense?

Sir, why is it so hard for you to ask regulators: “Is it not when banks perceive something as safe that we would like for these to hold the most capital?”

Are you afraid they will give you a convincing answer and leave you standing there as a fool? Don’t you think that if they had had an answer they would have shut me up decades ago?

Simon Kuper in today’s FT writes about how America an Britain have fallen into the hands of incompetent amateurish well-off baby boomer politicians, born between 1946 and 1964, “Brexit, Trump and a generation of incompetents”.

Sir why could that not also be applicable to baby boomer regulators, like for instance Mario Draghi, Stefan Ingves or Mark Carney?

PS. We should note though that it was a pre-baby-boomer generation’s Paul Volcker and Robin Leigh-Pemberton who were responsible for the origins of this monumental regulatory faux pas.

@PerKurowski

December 15, 2017

While Brexit is only in the Limbo circle, Martin Wolf seems already convinced that all ye who entered there should shed all illusion and abandon all hope.

Sir, again Martin Wolf writes as if being convinced there’s no life, at least no good life for Britain, after Brexit. “Britain has more illusions to shed on Brexit” December 15.

Why? Of course Brexit is challenging, but not only for Britain. I have always thought of Britain as glue that helps holds the European Union together, so I am sure Brexit must be very challenging to EU too.

What should be done? I would just go for it! Massive government tweeting: “Brexit is not about Britain not wanting to have anything to do with Europe. It has all to do with Britain not being comfortable with the decisions of the EU technocracy.”

And then tweet: If Britain is willing to pay such a large fine for being able to get out of the EU club, should you, as members of that same club not be concerned with that?

And incite the Europeans to take the Brexit opportunity for together with Britain redefining a better Europe.

Sir, I argue this as I am convinced that if you’ve already mentally surrendered, and think you must accept any conditions offered by a Neo-Versailles treaty, then you are really lost. And for many reasons I do not like that to happen to Britain.

Or as Violet Crawley would say, don't be so defeatist, it’s so middle class. 

Okay, I might have gone bonkers on this (too), but let me assure you that Martin Wolf is no Winston Churchill either.

PS. Freshening up on Dante’s “Inferno” I read that some sinners endure lesser torments than do “those consigned for committing acts of violence and fraud”. The latter, according to Dorothy L. Sayers’ translation, were guilty of "abuse of the specifically human faculty of reason". Oops, could that include bank regulators who require banks to hold more capital against what is perceived risky, when in fact it is when something perceived safe ends up being risky, that we all most need our banks to hold that?

Sorry, just asking, I have no intention of wanting to send for instance Mario Draghi to hell. Parading him down our main avenues wearing a dunce cap would suffice.


@PerKurowski

Good intentions are not sufficient. Regulators, wanting to do good by making our banks safer, messed it up completely for us.

Sir, Gillian Tett writes a “survey by US Trust shows that three-quarters of millennials put a high priority on social goals when they invest; that is a stark contrast to baby-boomers, where the proportion was only a third.” “Making money and doing good” December 15.

“US millennials are slated to inherit around $12tn of assets in the next decade or two”

In Wikipedia, on millennials we read: “The Great Recession has had a major impact on this generation because it has caused historically high levels of unemployment among young people, and has led to speculation about possible long-term economic and social damage to this generation.

That great recession was caused by the financial crisis 2007-08, and that crisis was the result of well-intentioned regulators wanting to keep banks away from the “risky” allowed banks to leverage immensely with the “safe”. And so banks created excessive exposures to AAA rated securities, residential mortgages and sovereigns like Greece, which all blew up.

And if millennials understood how their future older age could be so much more difficult than their current elders, precisely because good intentioned risk-aversion have kept banks away from financing the risks needed in order to build their future, they would give less priority than baby-boomers to good intentions and consequentially by slightly more skeptical about investing in social goals.

A Ford Foundation has all the right in the world to pursue its goal as they feel fit, but it should not forget that the world is full of good intentions gone wrong.

Tett mentions that “one of Ford’s first projects, for example, will be to invest in affordable housing in Detroit and Newark; the idea (or hope) is that this will provide measurable returns and statistics about home formation”. I hope Ford, before that, analyzes well the prospects of getting jobs there because, much more important than giving someone an affordable home, is to help that someone to afford a home.

Basel Committee’s standardized risk weights of 35% for residential mortgages and 100% for loans to entrepreneurs just guarantees that so many more of the millennials will end up living in the basements of their parent houses… and if reverse mortgages keep on increasing, then without even the hope of inheriting the houses… severely reducing the expectations of “US millennials are slated to inherit around $12tn of assets in the next decade or two”

Sir, the real value of an inheritance only shows up at the moment of the inheritance… something that too many Venezuelan’s that inherited assets there can attest to.


Here is an alternative doing good proposal for the Ford Foundation. Capitalize a bank to hold 15% against all assets, except for loans that have great job creation or green ratings for which only 10% of capital is needed, and then pressure the management to obtain high returns on equity. That is taking risks with a purpose, that could somewhat help to neutralize the distortions produced in the allocation of credit to the real economy by the current risk weighting… and that is something definitely good…I think… though of course even I could also be wrong.

@PerKurowski

December 08, 2017

If bitcoin poses no threat because it’s perceived risky, why agree with regulations that hold lending to entrepreneurs is dangerous because they are risky?

Sir, I refer to your “Do not worry about bitcoin — at least not yet” December 8.

Of course while bitcoin are perceived risky they pose no major danger. What I cannot understand though is why you do not extend that same reasoning to bank regulations?

What if suddenly bitcoin holdings were suddenly in terms of safety rated AAA by credit rating agencies, and regulators allowed banks to leverage over 60 times with these? That would make these bitcoin really dangerous, as happened when Basel II allowed banks to leverage with AAA rated securities.

That leads me to comment: “A flawed blue print for reform of the Eurozone” also of December 8.

Sir, if it were up to me I would not allow any expert technocrats to come even close to any institution in the Eurozone, before having received a satisfactory answer on why their regulators want banks to hold the most capital against what is perceived as risky. As I see it, it is when something ex ante perceived very safe ex-post turns out to be very risky, that we would like our banks to hold the most of it.

For instance would you like your banks regulated by those who assigned sovereign Greece a 0% risk weights and German entrepreneurs 100% and thereby caused German banks to lend more to Greece than to their local entrepreneurs? I sure would not!

@PerKurowski

The Basel Committee’s bank regulators being replaced by an algorithm could be the best that could happen.

Sir, I refer to Gillian Tett’s “Self-driving finance could turn into a runaway train”, December 8.

Well human-driven banks are now not doing so well either. 

Any algorithm currently making credit decisions for a bank would do so based on maximizing risk-adjusted returns on equity, based on perceived risks of assets and on regulatory bank capital requirements regulations.

Where would it get the risk perceptions? Currently credit ratings… Who knows if in the future algorithms would also take over the credit rating functions… if these have not already done so?

Where would it get the capital requirements? Currently it get those from the Basel Committee’s standardized risk weights, or if the algorithm works for a sophisticated bank, from its own risk models.

So, if the algorithm does its job well, and works for a sophisticated banks, it would seem that in order to obtain the highest risk adjusted return on equity, its priority has to be creating the risk model that minimizes the capital requirement.

And if it works for a bank that uses the standardized risk weights, then it is clear it would not waste its time with what carries a 100% risk weight, like an entrepreneur, but concentrate entirely on those with much lower risk weights, sovereign 0%, AAA rated 20%, residential mortgages 35%.

So, with the risk weighted capital requirements it is clear that whether the banker is a human or an algorithm, we can forget about savvy loan officers… they will all be equity minimizers.

Of course, an entrepreneur can always offer to pay sufficiently high interest rates to overcome the regulatory handicap. But, would doing so not make him even more risky? With current regulatory risk aversion we should cry for the future real economy of our children.

Sir, in 2003, at the World Bank’s Executive Board (before Nassim Nicholas Taleb had appeared on the scene to discuss fragility) I stated: "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."

So, I guess you can you imagine how much I fret us humans falling into the hands of a final conquering algorithm.

Or having to suffer the consequences of the systemic risks resulting from banks using fewer and fewer human bankers… with probably higher bonuses to the remainders.

By the way since the replaced bankers used to pay taxes, will we at least be able to tax those algorithms?

But, come to think of it, if an algorithm substituted for bank regulators that could be great news. I mean any half-decent algorithm would be able to figure out that what is really risky for our bank system is not what is perceived as risky but what is perceived as safe.

And any half-decent algorithm would also require an answer to the question of “What is the purpose of banks?” And I suppose no regulator would dare tell it, “Only to make the maximum risk adjusted returns on equity” 

@PerKurowski

December 06, 2017

Some might see Donald Trump’s bankruptcies as a weakness, but others, especially in America, as a symbol of go-get-it strength.

Laura Noonan, Patrick Jenkins and Olaf Storbeck write: “Deutsche Bank has been one of Mr Trump’s longest-standing and most supportive lenders, extending him hundreds of millions of dollars in credit for real estate deals and other ventures despite his history of bankruptcies.” “Deutsche Bank hands over Trump files to Mueller probe of Russian influence” December 6.

Sir, the way it is phrased might reflect some profound cultural differences. Is it really “despite Trump’s history of bankruptcies”, or could it precisely because of it, that Deutsche Bank could be interested, as that would indicate business opportunities?

Let me quote the following from “The Wisdom of Finance” by Mihir A. Desai, 2017, Chapter Seven “Failing Forward”:

“Until 1800 [in America], borrowers who could not service their debts were moral failures. As a consequence, imprisonment was common for debtors…

Failure would be redefined away from moral failing or a sin and toward a more natural consequence of risk taking with the 1800 act. [The first bankruptcy law]… the new republic desperately needed risk takers, and punishing them so severely froze commerce in the late 1790. If the young country was to flourish, failure had to be redefined, and the moral stigma associated with it had to be lessened.”

Sir, after current regulators, with their risk weighted capital requirements, for soon three decades now, have exacerbated the normal risk aversion of our bankers… I would argue we currently are also in desperate need of risk takers. God make us daring!


@PerKurowski

More food for the hungry and less food for the less hungry sounds logical and decent, that is unless the hungry are obese and the less hungry anorexic.

Sir, Martin Wolf writes: “More equity capital would make banks less fragile.” “Fix the roof while the sun is shining” December 6.

That is only true as long as we get rid of the distorting risk weighted capital requirements for banks. Though “more risk more capital - less risk less capital” sounds logical, that is unless “The Safe” get too much credit and “The Risky” too little. If that happens, both banks and the economy will end up more fragile.

Wolf writes: “The world economy is enjoying a synchronised recovery. But it will prove unsustainable if investment does not pick up, especially in high-income economies. Debt mountains also threaten the recovery’s sustainability”. Let me comment on that this way:

First: “a synchronised recovery” is a way to generous description of what is mostly a QE high that has just helped kick the crisis can down the road.

Second: The investments most lacking in the “unsustainable if investment does not pick up” part, is that of entrepreneurs and SMEs, those which have seen their access to bank credit curtailed by regulators. It is high time we leave the safer but riskier present and get back to the riskier but safer future.

Third: The “Debt mountains [that] threaten” are either those for which regulators allow banks to hold much less capital against, like sovereigns and residential mortgages; or those consumer credits at high interest rates that dangerously anticipate consumption and leaves us open to future problems.

Sir, let me again make a comment on Wolf’s recurrent recommendation of “Public investment to improve infrastructure”. He usually argues this in order to take advantage of the very low interest rates. That ignores that those low rates are not real rates but regulatory subsidized rates. If banks had to hold the same capital against loans to sovereign than against loans to citizens, and if also central banks refrained from additional QEs, I guarantee that the interest rates on public debt would be much higher.

Besides, given the fast technological advances, we do not even know what infrastructure will be so much needed in the future so as to be able to repay the loans, instead of just burdening more our grandchildren.

@PerKurowski

December 03, 2017

When being rightly suspicious about making algorithms powerful let us not ignore that powerful humans could be very dangerous too.

Sir, Tim Harford, agreeing with Hayek holds “Market forces remain a more powerful computer than anything made of silicon.” “Algorithms of the world, do not unite!” December 2.

But when regulators decided to replace the risk assessments of thousands of individual and diverse bankers, with those produced by some few human fallible credit rating agencies; and then allowed banks to increase their bets on these ratings being correct, for instance with Basel II allowing banks to leverage a mindboggling 62.5 times if only an AAA or an AA rating was present, we would have benefitted immensely from having some algorithms indicate them this was pure folly.

Because, in the development of such algorithms, it would not been acceptable to look solely at the risks of bank assets as such, but would have required to consider the risk those assets posed for the banks.

And as a result the algorithms would not have allowed banks to leverage more with safe assets than with risky, that because only assets perceived as very safe can lead to the build up of such excessive exposures that they could endanger the whole bank system, were the credit ratings to turn out wrong.

An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” expresses: “The model [is] portfolio invariant and so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.”

And the explicit reason given for that inexplicable simplification was: “Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

Sir, algorithms are precisely designed to combat such complexities.

Yes, “Facebook and Google have too much power” but so did the regulators; and with their risk weighting of the sovereign with 0% and citizens with 100%, Stalin would have been very proud of them.

@PerKurowski

December 02, 2017

What cultural insight could anthropologist Gillian Tett, or any neo-Cannibal Club colleague of hers give in order for me to better understand bank regulations that seem so loony?

Sir, Gillian Tett, commenting on Marc Flandreauan economic historian’s 2016 book “Anthropologists in the Stock Exchange”, writes about the “Cannibal Club, a so-called anthropological society that, its members hoped, would explore far-flung cultures in order to uncover what made humans tick” “It is primitive to ignore what links finance and social science” December 2.

When Tett refers to that “By the middle of the 19th century, much debt was turning sour due to defaults, corruption and fraud (some perpetrated by British swindlers who misled investors about opportunities on offer). Sovereign loans in places such as Venezuela kept delivering nasty shocks.” I would then have liked very much to be able to ask those anthropologists whether if all, or any, of those failed financial assets had been ex ante considered risky. 

Today I would also like to ask any neo-Cannibals why they think current bank regulators could want banks to hold more capital against what is perceived as risky? To me that is a mystery. Is it not when something perceived ex ante as very safe turns out ex post as very risky, that one would really like banks to have the most of it?

On Venezuela’s defaults, Tett suggests “thinking about this historical link between capital markets and culture, and between finance and social sciences” I would add the fact that Venezuela’s main export revenues, oil, currently 97% of these are centralized in its government. If that’s not enough to know that things will, sooner or later, go utterly wrong, I do not know what is.

@PerKurowski

To allow banks to regain public trust and better serve the UK economy, begin by explaining how their regulators distorted banking.

Sir, you write about “the highly concentrated nature of the UK system, which is dominated by a handful of large institutions, with balance sheets skewed towards mortgage lending and other forms of consumer finance” and of a popular resentment of banker’s pay, “Corbyn’s calculated ‘threat’ to the banks”, December 2.

Banks’ balance sheets are skewed towards less-capital or very high risk-premiums, like lending to the sovereign, mortgage lending and other forms of consumer finance

Banks’ balance sheets are skewed away from what requires holding more capital and cannot afford to pay too high rates, like SMEs and entrepreneurs.

If you required banks to hold as much capital for all their assets as they must hold when lending to SMEs and entrepreneurs, then the story would be much different.

If you allowed banks to hold slightly less capital against loans to SMEs and entrepreneurs than against all other assets, that would more than compensate for the lack “of community banks or Sparkassen”; and introduce such economic dynamism that it could more than help you to confront any Brexit difficulties.

If banks needed to hold more capital in general, and therefore needed to compensate shareholders more, then there would be less available space for current abnormal banker bonuses. Ask Sergio Ermotti how much he has to thank regulators for his bonuses.

So, how to ensure that the banking sector can regain public trust and better serve the needs of the UK economy? Sir, why not begin by explaining what the bank regulators have done. We can of course not ask the bankers to explain that.

Oops, but that would mean you would have to explain why you have silenced my soon 2.700 letter to you on this, and that could be too embarrassing for one with your motto.

A brief aide memoire

@PerKurowski

December 01, 2017

Martin Wolf, a country needs its elites to inspire much more the “possible” than to preach the “impossible”.

Sir, in “Way back Home”, about his World War II days, we hear Rod Stewart singing: “we always kept the laughter and the smile upon our face. In that good-old-fashion British way with pride and faultless grace”.

And then we read Martin Wolf, reciting six impossible, not one possible, and ending with: “The EU holds the cards and it knows it holds the cards…The UK is no longer its 19th-century self, but a second-rank power in decline”, “Six impossible notions about ‘global Britain’’ November 31.

How utterly depressing!

We saw when Holland got smacked with the Dutch disease, and instead of just taking it laying down, they forgot about manufacturing, and decided to become the distributors of Europe… (at least that is the version I have been told)

Just days ago, November 29, in “Challenges of a disembodied economy” Martin Wolf discussing Jonathan Haskel’s and Stian Westlake “Capitalism without Capital: The Rise of the Intangible Economy” was illustrating the huge changes the world was going through, when for instance “Apple, the world’s most valuable company, owns virtually no physical assets. It is its intangible assets — integration of design and software into a brand — that create value.” In such a new world, is really the UK dependence on EU the same as previously seen? Does anyone really know what cards one holds nowadays? 

The day after Brexit, Britain will not be very different from EU, it will mostly be sharing the same old and new problems as EU and, unless Britain decides that is not to happen, there is nothing that eliminates the possibility of Britain’s relations with EU being more intensive and better than ever. A divorce, though it might be traumatic, does not mean the divorcees cannot get along splendidly.

Does that mean the Brexit road is easy rosy? Of course not, but there is a vital need for Britain, and for Wolf, to stop lamenting so much, and get down to work at doing the best, not out a bad situation, but out of an for everyone unknown situation.

Like when Rod Stewart’s song ends with hearing Churchill reciting: "We shall fight on the beaches. We shall fight on the landing grounds. We shall fight in the fields, and in the streets. We shall fight in the hills; we shall never surrender." 

PS. To begin with you should reverse having surrendered your banks to dangerous risk aversion, and eliminate the loony risk weighted capital requirements for banks

@PerKurowski

November 30, 2017

Banks with better capital will not stifle investment and growth. Bank capital requirements that are not neutral to perceived-risks will

Sir, I refer to David Miles, Professor of Financial Economics, Imperial College letter in which he argues that “Better capitalized banks will not stifle investment and growth” November 30.

He is of course right, but with some caveats.

First, it has to be reasonably well capitalized banks since, going overboard on capital requirements, might reduce the margins arising from leveraging and make getting that additional capital (equity) needed quite difficult.

Second, it is a delicate matter of how going from here to there. If you impose some drastic immediate adjustments then you must be prepared to go for instance the Chilean way, where its central bank made some important capital contributions but allowed former shareholders to repay them and buy them out when they could.

But, but, but! If you insist in that capital being risk weighted, it will just not work.

Suppose you want a 100% capitalized bank, but when calculating that 100% you keep on risk weighting the sovereign with 0%. That would mean that a bank would come up with 100% of equity if lending to a 100% risk weighted entrepreneur, but would be allowed to hold zero capital (equity) when lending to the sovereign. Would that just not be 100% top down Stalinism? How much non-governmental jobs could be created that way?

So, if we are to have economic growth, and banking sector stability, much more important than how well capitalized is that they are perceived-risk neutral capitalized. 

Sir, you know how much I have been criticizing current bank regulations, but my first Op-Ed ever, in 1997, was titled “Puritanism in Banking”, and I still think that what we least need is too much of that. God make us daring!

And, since I will try to copy this letter to Professor Miles, I will hereby take this opportunity to ask him whether he has any idea of why regulators want banks to hold the most capital for when something perceived risky turns out risky? Is it not when something perceived ex ante as very safe turns ex post out to be very risky, that one would like banks to have the most of it?


@PerKurowski

Sadly, banks must now to take on board rules that were not adjusted to what caused the crisis.

Sir, Martin Arnold, your Banking Editor writes: “In the coming year, much of the alphabet soup of post-crisis financial regulation will be completed — including Basel III, IFRS 9 and Mifid II — giving the industry the most clarity for almost a decade on the rule book it must follow.” “Lenders take on board rules of a post-crisis world” December 30.

We are soon three decades after regulators in 1988 with Basel I, concocted risk weighted capital requirements for banks, and 13 years after they put these on steroids with Basel II’s risk weights of 0% for sovereigns, 20% for AAA rated, and 35% for residential mortgages. That caused irresistible temptations for banks to create excessive exposures to these “safe” assets, which resulted in the 2007/08 crisis. And yet there is almost no discussion about that monstrous regulatory mistake.

So the risk weighting is still part of the regulations; and therefore the 0% risk weighted bank exposures to sovereings keeps growing and growing; as well as is the disortion of bank credit in favor of the “safer” present and against the “riskier” future. 

In this respect if I were to title something of this sort at this moment it would be more in line of “Lenders take on board rules that have not been adjusted to the crisis and therefore guarantee a world with even larger bank crises”

The irresponsibility and lack of transparency evidenced by the members of the Basel Committee is amazing. The lack willingness of media, like the Financial Times, to pose some simple questions to these regulators, is just as incomprehensible. 

When the next bank crisis, or the next excessive exposure to something perceived as very safe blows up in our face, how will your bank editor then explain his silence on this?

@PerKurowski

November 29, 2017

What does going from a 10% to a 50% level of distraction signify for full-time employees’ real salaries?

Sir, Sarah O’Connor writes “Males in well-paid full-time employment, earning 2.5 times the median wage, are now working slightly longer hours on average than two decades ago, according to the Resolution Foundation, a think-tank.” “Robots will drive us to rethink the way we distribute work” November 29.

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

So if 50% of the time is now spend being distracted, and since those not employed full time are not equally remunerated for distractions, that of “earning 2.5 times the median wage”, could de facto be a serious understatement.

Sir, just think about what going from for instance a 10% to a 50% distraction signifies to full time employees’ real salaries. Fabulous increases!

PS. Or what would the real employment rate be if we deduct the hours engaged in distractions? A statistical nightmare? Will we ever be able t compare apples with apples again?

PS. Robots will not only drive us to rethink the way we distribute work. It also forces us to think about how to create decent and worthy unemployments.

@PerKurowski

Those who because of scalability can bother us excessively should not be able to do so at a zero marginal cost

Sir, Martin Wolf writes: “Scalability means that an intangible good can be enjoyed by one person without depriving another of its benefits. In an economy where scalability — frequently turbocharged by network effects — is important, some businesses will quickly become huge. These winners may also enjoy huge incumbency advantages.”, “Challenges of a disembodied economy”, November 29.

Indeed, but also look at how a zero marginal cost allows the social media to drown us in such an excessive amount of ads, fake news and irrelevant information, which so dangerously wastes our very limited attention span.

So when Wolf writes “governments must also consider how to tackle the inequalities created by intangibles, one of which (insufficiently emphasised in this book) is the rise of super-dominant companies” let me (not for the first time) suggest the following:

Charge social media, like Goggle and Apple, a very small bothering-tax, like a hundredth of a $ cent, every time they reach out to us with something that does not originate in something specifically allowed by us, like the direct messages from our friends.

That could, at the same time it builds up funding that could be used for a Universal Basic Income scheme, which helps to take the sting out of growing inequalities, reduce dramatically the bothering of us and allowing us more of that so necessary boredom we need for creativity and thoughtfulness, which we humans so specially need now when we have to interact more and more with artificial intelligent robots.

@PerKurowski

Ms. Janet Yellen, like other recent bank regulators who have just faded away, will leave the Fed without answering THE QUESTION

Sir, you write: “The Federal Reserve can take some blame for failing to see risks building up in the years preceding the global financial crisis. But perhaps more than any other major policymaking institution in the world, the Fed has acquitted itself well in the decade since”, “The unfortunate exit of an exemplary Fed chair”, November 29.

As you might suspect, I profoundly disagree. The Federal Reserve has yet not understood (or has been willing to acknowledge it) the fact that the “risks building up in the years preceding the global financial crisis” were a direct consequence of the distortions introduced by bank regulations, primarily Basel II, 2004.

If you allow banks to leverage almost limitless when lending to sovereigns, (like European banks lending to Greece); when financing residential housing; and over 60 times to one just because a human fallible rating agency has issued an AAA rating, that crisis, just had to happen.

And since capital requirements for banks have remained higher for what is perceived as risky than for what is perceived, decreed or concocted as safe, that odious distortion wasted most of the stimulus quantitative easing and low interest could have provided.

Over the last decade, how many SMEs and entrepreneurs have not gained access to that life changing opportunity of a bank credit, only because of these odiously discriminating regulations? Who can believe that America would have been able to develop as it did, if these regulations had been in place since the time of the pilgrims?

And now Janet Yellen, like other regulators have done in the recent past, will leave the Fed without answering us why banks should hold the most of capital against what is perceived as risky, when it is when something perceived very safe turns out very risky, that one would really like banks to have the most of it.


Sir, thanks for all the help you have given me over the last decade, forwarding that question without fear and without favour.

@PerKurowski

November 28, 2017

Venezuela faces a restructuring between odious creditors and odious debtors, so it behooves us ordinary Venezuelans citizens to intervene and block any odious deals.

Sir, Jonathan Wheatley and Robin Wigglesworth when reporting on the surreal sort of restructuring of Venezuela’s debt by the equally surreal Maduro government write: “Venezuela is already a serial defaulter. It has defaulted on miners, oil companies and other enterprises whose assets it has seized without compensation. It has defaulted on unpaid suppliers to PDVSA, the national oil company. Most seriously, it has defaulted on its people, denying them access to basic foods and medicines, causing an epidemic of weight loss and turning injury or illness into a mortal danger.” “Venezuela bond repayments: dead and alive” November 28.

Sir, the creditors, if they had carried out any minimum due diligence, would have been perfectly aware their financing would not be put to any good use, so for me, all their loans, given only because of juicy risk-premiums or other profit motives, are just odious credits.

And the borrowers, knowing very well they were contracting that debt for no good purposes at all, defines all these borrowings to be odious debts.

So here we are Venezuelans citizens, with children, parents and grandparents dying for lack of food and medicines. Are we now just supposed to sit down and allow this restructuring to happen on whatever odious terms the creditors and the debtors agree on in a petit committee?

No way! As a minimum, for a starter, our General National Assembly not yet in exile needs to authorize our Supreme Court of Justice in exile, to take charge so as to at least determine what could be deemed to be bona fide, dubious, or outright odious credits.


@PerKurowski

A former Executive Director of the World Bank, for Venezuela (2002-2004)

Andy Haldane, I am an economist too, but I can still not make head or tails out of your bank regulations. Please enlighten me with BoE’s “EconoMe”!

Sir, Chris Giles writes that Bank of England’s chief economist Andy Haldane argues that economists must work harder to help the public understand and accept their message. “If economics or economic policy is elitist and inaccessible to most people, it is not doing its job,” he said. “Economics should be more accessible” November 28.

Absolutely! So please could Haldane explain to me why regulators want banks to hold the most capital for when something perceived risky turns out risky, when it is when something ex ante perceived as very safe ex post turns out to be very risky, that one really would like banks to have the most of it?

The risk weighted capital requirements allow banks to leverage differently different assets, and thereby allow banks to earn different risk adjusted returns on equity on different assets, must distort the allocation of bank credit to the real economy. Some, like for instance “risky” entrepreneurs are paying with less access to credit for the regulators favoring “safe sovereign, AAArisktocracy and house financing. That must not be helpful for creating new jobs. Am I wrong? If am not, why does this seem to be of no concern to regulators?

And talking about favoring, who authorized the economists to suddenly take upon themselves to decide that the risk weight of the sovereign was 0% and that of citizens 100%? Is that not just outrageous statism? Has that not caused governments getting credit at much lower rates that they would otherwise have gotten? Has that not caused governments to take on much more debt than they would otherwise have been able to do?

If Haldane does not know the answers to these questions perhaps he can ask Mark Carney, Mario Draghi, Jaime Caruana or Stefan Ingves.

And if those elite experts can’t provide him with a satisfactory answer, perhaps he should sit down and listen to me. I as one economist to another would willingly explain to him the regulatory lunacy he is involved with. For a first session of that, Haldane could prepare reading THIS:

PS. And at FT you are all also cordially invited. Since you have mostly ignored, and even hushed up my arguments, I know that if Haldane proves me wrong, you will all feel tremendously alleviated.

@PerKurowski