October 20, 2017

We sure have a major problem with central bankers that seemingly haven’t the faintest about what they’re doing.

Sir, Matthew C Klein writes “Rightly or wrongly, most central bankers think their mission is to keep the growth rate of consumer prices slow and stable. Even in places, such as America, that also ask the central bank to promote “maximum employment”, the inflation mandate is paramount.” “Central bankers have one job and they don’t know how to do it”, Alphaville October 18.

And the Klein proceeds to describe the existing confusion with respect to how to measure inflation, how to generate it if it is so good, and how to fight it if it is so bad. 

But equally, when central bankers have anything to do with bank regulations, they think their mission is solely to keep banks from failing, without giving a single thought to the fact that banks are supposed to allocate credit efficiently to the real economy.

And even in this their silly limited objective they fail; that because they have not understood that what is really dangerous to the bank system, is not what is ex ante perceived as risky, but what is ex ante perceived as very safe and which therefore can generate dangerous excessive exposures to what might ex post turn out to be very risky… all this currently aggravated by the fact that regulators allow banks to hold especially very little capital (equity) against what is perceived as safe.

Sir, do we have a problem!

@PerKurowski

An all out war against inequality would be extremely harmful to us all.

Sir, Tim O’Reilly writes: “Clayton Christensen’s, “law of conservation of attractive profits” holds that once one thing becomes commoditised, something else becomes valuable.” And that “Hal Varian, Google’s chief economist, noted that ‘if you want to understand the future, just look at what rich people do today’. “People power, not robots, will overcome our challenges” October 20.

But I ask, does that not require a strong supply of rich and unequally wealthy, in order to power that demand for the new, that which majorities never generate? And, if so, does that not put a dent on the argument of: “the fundamental question of our economy today is not how to incentivise productivity, but how to distribute its benefits”?

Sir from this perspective the current all out war against inequality could be extremely harmful for all. For instance, as I have, unanswered, often tweeted to Mr. Thomas Piketty “Visit the Museum of Louvre in your Paris and try to figure out how much of it would have existed, had it not been for extreme inequality.”

And O’Reilly, as a source of jobs refers to that “there is the looming spectre of climate change”. Indeed but who is going to pay for the fight against it? If government takes on debts to fight climate change, who will volunteer to repay those debts tomorrow, whether we are successful or not? No one!

That is why I have argued so much in favor of creating a whole new generation of social incentives, which could help get the world to work in the same direction on at least some important issues.

For instance, if there was a huge carbon tax, which revenues did not go to the redistribution profiteers but were shared out equally among all citizens, then we could link up the fight against climate change with the fight against inequality, without affecting the remaining societal incentive structure… that which helps to create the inequality we need.

PS. And please never forget, just in case there will not be enough jobs tomorrow, to think about how we can create decent and worthy unemployments.

@PerKurowski

With risk-weighted bank capital requirements promoting risk aversion, Britain will go nowhere, with or without Brexit

Sir, Martin Wolf writes: “UK’s average productivity is at best mediocre and its productivity growth post-crisis is in the basement, down there with Italy’s. Investment is weak and relative export performance consistently dismal. Contrast Germany.” “Zombie ideas about Brexit that refuse to die” October 21

So, when he then argues “It will be impossible to offset the loss of favourable access to EU markets, which now take some 40 per cent of the UK’s exports” a natural question is, would not those losses seem to happen anyhow, with or without Brexit?

Could it in fact be that “favourable access” has dangerously hidden other profound problems?

I would never have voted for Brexit, but that might only be because I do not know Britain well. Had I for instance thought that it was becoming more and more dependent, on a not so dependable EU, I might have voted otherwise. Because frankly, EU is in great need of some real shaking up too, in order not to fall into the hands of those populists both Martin Wolf and I so profoundly fear.

Of course Wolf is right when he says “In a liberal democracy, we are all entitled to our opinions and to seek to overturn what we consider grossly mistaken decisions.” But Sir, should that not require something more than just being against “saboteurs with zombie ideas”?

Should that not include proposals about what Britain could do in order not to have given the Brexit vote a chance? And, who knows, those changes could be just as important or even more important than staying in the EU.

Clearly taking on debt to propel consumption, plus building a lot of infrastructure caring not sufficiently about the fact that we might not know enough about what infrastructure could be needed twenty years from now, sounds like a very comfortable plan for the short term. But, is it enough for Britain’s grandchildren or their children?

Personally, as Wolf very well knows, I would put the elimination of bank regulations that dangerously distort the allocation of bank credit to the real economy, very high on that list of proposals.

The first banks to do that have the best chance of becoming the strongest banks in the future. Is it not high time for Britain’s banker to return to being savvy loan officers, instead of the silly bank capital (equity) minimizers they have now become?

PS. Frankly the idea you can identify all risks, and stop these from happening, without unexpected consequences, seems to me one of the mother of all zombie ideas of our times.

@PerKurowski

October 19, 2017

I am the grandfather of two Torontonian girls. Do I like Alphabet’s Sidewalk Labs? I love it… as long as

Sir, as a father of two Torontonians, and grandfather of other two Torontonians, it is of course with much interest I read Leslie Hook’s “Toronto offers Alphabet downtown land to practice designs for cities of future” October 19.

I do love that "Quayside" project… subject to:

It shoots for the most intelligent artificial intelligence and the smartest robots, as I would hate my granddaughters to have to surround themselves with half-baked artificial intelligence and 2nd class robots.

It allows for some here-you-can-totally-lose-yourself free from artificial recognition space to my granddaughters, in order for them to be able to find themselves, and all is not Big-Brother-watches you space.

It provides some absolutely-nothing-spots that guarantee my granddaughters to be able to experience, quite often, that boredom so essential for creativity and thinking.

It does not leave in its wake a huge Torontonian debt to be serviced by the grandchildren of my granddaughters.

Alphabet splits, at least 50% 50%, with Toronto, all profits that could be generated by all patents resulting from inventions and experiences obtained during the Sidewalk Labs project.

PS. And of course as long as it duly considers the possibility or rising water levels.

@PerKurowski

Bankers instead of being savvy loan officers generating growth, have turned into dangerous addicted equity minimizers

Sir, Ben McLannahan quotes Paul D’Onofrio, the chief financial officer at Bank of America, with that he welcomed any “refinement” to rules that “allows us more access and control over our capital [and] liquidity in support of responsible growth”, “End of the crisis-era growth taboo at US banks”, October 19.

Sir, that is a recipe for disaster. First it will of course lead to that banks will go on minimizing the equity they hold, trying to leverage more, so as to earn higher risk adjusted returns on equity. That will not make banks safer or, most importantly, make them allocate credit efficiently to the real economy. 

The result is that banks will keep on lending too much to what is perceived, decreed or concocted as safe, against too little capital; something which is the perfect recipe for bank system failures.

And that banks will lend much less than what they should, to those that are perceived as risky, like for instance to SMEs and entrepreneurs, something which is the perfect recipe for a stagnating economy.

Tim Adams, president and chief executive of the Institute of International Finance, with reference to the Fed’s mandate mentions: “I think there’s a different mandate now, [which is:] how do you ensure the system is safe and sound and resilient while also ensuring you have balanced growth and that financial institutions can support economic activity?”

Sir let me tell you how! By having one single capital requirement, like a reasonable ten percent, to apply to all assets, except cash.

McLannahan also writes that Mike Mattioli, a portfolio manager at Manulife Asset Management in Boston opines: “Reasons to be upbeat include growth in mortgages, a return of “animal spirits” in small-business borrowing, and a “little bit more leverage” in balance sheets, as regulators allow banks to return more capital in the form of dividends and share buybacks.”

“Growth in mortgages”: Sir, do we really need much of that?

“A return of “animal spirits” in small-business borrowing”: Sir, while that requires banks to hold more capital than against other assets, the banks will not be there to lend to these “risky” borrowers.

“Regulators allow banks to return more capital in the form of dividends and share buybacks so “little bit more leverage”: Sir, that really sounds scary, as that would indicate regulators have not understood anything about what is going on. Bankers instead of maximizing returns on equity by being savvy loan appraisers have now for that turned into addicted equity minimizers.


@PerKurowski

October 18, 2017

Much more than the Paris Climate (photo-op) Agreement, our pied-à-terre needs revenue neutral carbon taxes

Sir, Martin Wolf writes: “In no area are global spillovers more significant and co-operation more vital than climate… The main obstacles to such action are three. First, specific economic interests, notably in the fossil fuel industry… Second, free-marketeers, who despise both governments and environmentalists, reject the science, because of its (to them) detestable policy implications. Third, few wish to…threaten their standard of living, for the sake of the future or people in poorer countries” “Climate change puts poorest nations at risk

Not so fast! There are those of us who believe that the threat of climate change is so real that there is no need to convince us with the “people in poorer countries” argument. The best interests of our grandchildren suffice. And there are those of us that despise the idea that so much of the important sacrifices required could be dilapidated enriching governments and environmentalists. To mostly attribute “specific economic interests” to the fossil fuel industry is to be too biased.

Of course the poorer countries should be helped, but the brunch of the climate change war effort, needs to be carried out as much as possible by sending out strong market signals, letting the markets operate freely assigning resources; and aligning the incentives as best as possible.

For that I strongly believe that a huge carbon a tax, shared out entirely to the citizens, is what first should be happening. Let us for instance suppose that petrol (gas) was sold all over the world at Norway’s current price of about US$2.10 per liter (Venezuela would have to increase its prices US$2.09 per liter) and that 100% of what that tax produces, goes directly back to the citizens.

Then we would fight climate change and inequality at the same time; which would be great since as Martin Wolf rightly holds: “The linked challenges of climate and development will shape humanity’s future.”

Sir, nothing in the Paris Climate (photo-op) Agreement seems to me remotely as powerful and effective as revenue neutral carbon taxes.


@PerKurowski

October 17, 2017

As a bare minimum the real Venezuela should now create a Recovery Inc., to get back what’s been stolen from it.

Sir, I read John Paul Rathbone’s and Shawn Donnan’s “Markets urged to prepare as IMF weighs exceptional Venezuela rescue” October 17. Sadly it misses some important points.

Suppose that there is a new government… because with the current one there is nothing to be done, there should be nothing to be done.

Then you can initiate a worldwide recovery effort of what was stolen from Venezuela and that could, should, yield let us estimate at least $50bn, and that after the bounty hunters or whistleblowers have been paid their commissions.

If you stop giving away gas in Venezuela, something I am trying for the World Bank or the IMF to declare as a punishable economic crime against humanity, then you would release, in a sustainable way, billions in resources year after year. Look at it this way, Venezuela sells gas (petrol) at less than $1 cent per gallon, Norway sells it at $2.07 a gallon.

Also, just clearing the air of the current bandits, would release the energies of at least a million of Venezuelans full of initiatives that are dreaming of returning to their country.

And, if there is not a new government, then an exiled government, like De Gaulle’s French government in London during World War II, and which counts with a legitimate National Assembly, and a legitimate Supreme Court (in exile), could, should, at least get going with Venezuela’s Recovery Inc.

Of course, at the end of the day, the oil revenues must begin to be shared out directly to all Venezuelans, instead of being manipulated by the chiefs of turn, because a tragedy in waiting like Venezuela’s current one, should never be permitted to happen again. 


@PerKurowski

Long term growth, development, in India and elsewhere, requires getting rid of Basel's regulatory risk aversion.

Sir, Eswar Prasad writes: “the real question for policymakers in India is not about how they can boost growth temporarily but how to create the environment to elicit private investment. Without that, durable longterm expansion will remain a mirage”, “Long-term growth in India depends on serious reform” October 17.

It is now ten years since at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document titled: “Are the Basel bank regulations good for development?

Its first paragraph states: “It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope, since risk taking is an integral part of its economic vitality, but it is a real tragedy when developing countries copycats that and falls into the trap of calling it quits.”

And from what I have seen, in terms of Basel’s banking regulations, India is proceeding as if just as papist as the Pope.

The risk weighted capital requirements; those that dangerously distort the allocation of bank credit in favour of what is perceived decreed or concocted as safe, and against what is perceived as risky, like SMEs and entrepreneurs, are still going strong there.

That is the danger of empowering technocrats that are more interested in showing off to colleagues what’s fashionable in Basel than wearing what they should wear back home.

PS. The document referred to was also reproduced in India, in October 2008, in The Icfai University Journal of Banking Law Vol. VI No.4

@PerKurowski

October 16, 2017

The Financial Times’ FT’s lack of curiosity is astonishing

Sir, to this date I have written you 50 letters questioning the wisdom of those bank regulators who assigned a risk weight of only 20% to what is AAA rated, and of 150% to what is below BB- rated.

It is precisely what’s perceived as very safe, AAA rated, that could cause the buildup of dangerous exposures that could result in major bank crisis if those perceptions turn out to be wrong; and it is precisely what’s perceived as very risky, below BB-, that is the most innocuous to our bank systems, since banks would never ever create any larger exposures to borrowers or investors so rated.

One could have thought that Financial Times would be interested in exploring and analyzing the arguments regulators could have been using to come up with such strange risk-weights.

But Sir you are clearly not curious at all about this. Why? I mean because your motto is "Without fear and without favor" 

@PerKurowski

October 14, 2017

If you cannot lose yourself, how on earth will you learn about finding yourself?

Sir, Janan Ganesh writing about needed freedom asks: “Where can you lose yourself, either in crowds or in isolation from them? Where can you meander for hours? Where do you have to watch your words and manners the least? Where lets you get to and from other places on a whim?” “Citizen of nowhere” Prize for freest city goes to . . .” October 14.

Yes, where? And if today you can, where will you go tomorrow when facial recognizers follow you around?

Frightening. I have always held that all young (and perhaps old too) need to be able to lose themselves in order to gain the insights that allow them to find themselves. And that discovery journey must of course not be carried out with the assistance of a GPS.

Modern technology, including of course social media, seems to dramatically be changing the way young (and old too) position themselves in life and society.

PS. Try the following experiment. When you are driving down a mountain and you have some young passengers in the car, mention that you are going south, and when you are driving up, mention that you are going north. You’ll be amazed how many young will think you are right, without giving the least consideration to the fact you are driving in the opposite direction

@PerKurowski

For the complexity of banks, regulating demagogues gave us the simple solution of risk weighted capital requirements

Sir, Martin Wolf writes that current “upheavals [2007-08 Crisis, Great Recession] have, as so often before, opened the way to demagogues, promising simple solutions to complex problems… Brexit… Trump…Catalonia”, “A political shadow looms over the world economy” October 14.

Indeed, but much of the upheavals were caused directly by the members of an exclusive mutual admiration club of populist regulators, who sold the world that monumental piece of demagoguery of risk-weighted capital requirements for banks. “You all relax… we have weighted the risks.”

And though they never defined explicitly the purpose of banks, because seemingly they do not care about that, implicitly, de facto, their risk-weights indicate what the banks should do, and what not. That is so because less capital, means higher leverage, which means higher risk adjusted returns on equity.

So now we have: thou shall lend to sovereigns, to members of the AAArisktocracy and to finance residential houses; and thou shall not lend to risky SMEs and entrepreneurs.

And when the first results of those regulations, the excessive exposures to AAA rated securities, and to sovereigns like Greece appeared and caused crises, they did not rectify, they kept their risk weighting, and their central bank brothers kicked the cans down the road with QEs and ultralow interest rates.

So look at the stock market going up while becoming riskier because of the de-capitalization that results from taking up loans to pay for dividends and buybacks.

So look at house prices being overinflated, as evidenced by the lagging of rental values; while central bankers turn a blind eye to house prices not being in the consumer price index, but that rentals are.

So look at how sovereign debt levels are growing almost everywhere.

The monstrous silence about the distortions produced by bank regulations, like by influential opiners like Martin Wolf, is only helping to generate even more nutrient ingredients to all too many populists in waiting. God help us!

@PerKurowski

October 13, 2017

It is the lower capital requirements when lending to AAArisktocracy that stops banks from lending to “The Risky”.

Sir, Gillian Tett writes about the growing sector of private funds that, instead of banks, are now lending to the “riskier”, like SMEs and entrepreneurs. “Ham-fisted rules spark the creativity of lenders” October 13.

That is explained with: “these funds only exist because there is a tangible need: mid-market companies need cash, and banks are reluctant to provide this because the regulations introduced after the 2008 global financial crisis make it too costly for them to lend to risky, small clients.”

No! Before risk-weighted capital requirements were introduced, all cost and risk adjusted interest rates were treated equally whether these we offered by sovereigns, AAA rated, mortgages, small and medium unrated businesses or anyone else. Not now, and especially not since Basel II of 2004.

Now banks can leverage those offers more when lending to “The Safe”, so they earn higher risk adjusted returns on equity when lending to The Risky, so they lost all interest in lending to The Risky.

In this respect the de facto cost of trying to make banks safer has therefore been reducing the opportunities to bank credit of those perceived as riskier, which of course increases inequalities.

Sir, please try to find any bank crisis that resulted from excessive exposures to The Risky. These always resulted from excessive exposures to what was ex ante perceived as belonging to The Safe.

@PerKurowski

October 12, 2017

Risk-weighted capital requirements for banks favoring the sovereign, artificially lowers the neutral/risk-free rate

Sir, Chris Giles writes: One “fundamental problem in central banking is that estimates of the neutral rate of interest — seen as the long-term rate of interest that balances people’s desire to save and invest with their desire to borrow and spend — appear to have fallen persistently across the world.” “FT Big Read. IMF Meetings: Setting policy in the dark” October 12.

That has an explanation:

Banks are allowed by the regulators to hold less capital against loans to the government (sovereign) than against loans to the private sector.

That means that banks are allowed to leverage more with loans to the government than with loans to the private sector.

That means that banks can earn higher risk-adjusted returns on equity with loans to the government than with loans to the private sector.

That means that banks, when compared to what they would have done in the absence of these distortive regulations, lend more to the government and less to the private sector; especially to the “riskier” part of it, like unrated SMEs or entrepreneurs.

That means there is a downward pressure on the interest rate on loans to the government, and, since these signify for the most a reference of the risk-free rate, that pulls all rates down from what should be their ordinary level.

And when that regulatory pulling down of rates is topped up with central banks with their QEs loads of government debt, the drop in the “risk-free” floor rate becomes truly important.

Sir, IMF and central bankers have been blind for a very long time to the distortions produced by the risk weighted capital requirements for banks.

Now and again they seem close to understanding it, like last November during IMF Research conference, but then they lose themselves again.

I guess, as Upton Sinclair Jr. said, “it is difficult to get a man to understand something when his salary depends upon his not understanding it.”

Now the real problem for me with central bankers goes way beyond this issue of the neutral interest rate.

My problem is that central bankers never resolved anything, they just kicked the 2007-08 crisis can forward, and basically left in place the distortions that produced it. So therefore a new crisis, could be an augmented one, just lurks around the corner. Great job guys!

And of course, with respect to central bankers pursuing an inflation marker, like in a greyhound race these pursue an artificial hare, I can’t but agree with Daniel Tarullo’s “Essentially you are setting policy on things you don’t know and can’t measure and then reasoning after the fact”.

@PerKurowski

October 11, 2017

France, why are you willing to give other countries the advantage of having better-capitalized banks?

Sir, Caroline Binham and Jim Brunsden write: France’s finance minister, Bruno Le Maire, said yesterday that France would oppose any increase in capital requirements for banks” France digs in heels over bank capital increase. “France digs in heels over bank capital increase” October 11.

I don’t get it. If I were a finance minister the last thing I would want to see are the banks of my country being less capitalized than that of others. I wonder what stories French banks must have fed him.

I am not referring to excessively capitalized banks. I just know that banks that might be leveraged 10 to 1, a capital requirement of 10% against all assets, will be more stable and more functional than a bank leveraged 20 to 1, the result of some generous risk weighted capital requirements. And I am sure that the first banks will be able to attract better shareholders willing to obtain lower but safer returns on equity, than those speculators interested in the latter option.

And the better-capitalized banks are, the more capable they are to assume that necessary risk-taking that allocates credit more efficiently to the real economy.

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

Banks described as safe in terms of risk-weighted capital requirements compliance are basically cross-your-finger-those-risk-weights-are-right safe banks. And I swear 0% for sovereigns, and 20% for what is so dangerously AAA rated, are absolutely wrong risk weights.

@PerKurowski

October 10, 2017

The costs of political statements and of regulatory decisions, should as much as is possible be transparently measured

Sir, your “The hard questions of fossil fuel divestment” of October 9, daringly raises some very timely questions that might not be so political correct, at least not for the high-priests of environmental protection. Hear, Hear!

If there is one detail I miss, that is perhaps about the need to set up a small procedure by which anyone could at least measure the on-going financial opportunity cost of that fossil fuel divestment. That could be quite easily done by keeping track on what those fossil fuel investments would have produced, and then compare these to the returns on the current portfolio.

Of course, as you end up writing, “It is a political statement”, but the costs of these should also be measured, as transparently as possible, which goes for regulatory decisions too.

The Basel Committee for Banking Supervision decided initially on a basic capital requirement of 8 percent. What has been the cost of then adjusting that capital requirement based on what is ex ante perceived or decreed as safe? Will we ever know? Will ever someone try to find out? Or will the cover-it-up forces prove to be overwhelming?

@PerKurowski

Beware, nudging, like that done by bank regulators, can have very dangerous unexpected consequences

Sir, Tim Harford writes: “Professor Richard Thaler’s catch-all advice: whether you’re a business or a government, if you want people to do something, make it easy.”, “Thaler’s Nobel is a well-deserved nudge for behavioural economics” October 10.

Yes “making it easy” is great advice, but it is only truly helpful if what is made easier is really good for you… otherwise it could be outright dangerous… like nudging someone over a cliff.

Regulators, caring little or nothing for the credit allocation function of banks, foremost wanted these to avoid risks. To that effect they allowed banks to hold less capital against what’s perceived or decreed safe than against what’s perceived risky.

With that regulators allowed banks to easily obtain higher risk-adjusted returns on equity lending to The Safe than when lending to The Risky.

With that regulators dangerously nudged our banks into too much exposure to The Safe and too little to The Risky.

The result was a bank crisis because of excessive exposure to The Safe: sovereigns, AAArisktocracy and mortgages; and economic doldrums because of insufficient credit to The Risky: SMEs and entrepreneurs.

Sir, and so here we are, without most not even knowing about the odious regulatory nudging that was as is being done.

What rules do we have to impose on nudging to make sure it is done right?


@PerKurowski

The marginal cost for others than my friends to connect and bother me on the web, should not be zero.

Sir, Rana Foroohar, with respect our lives and adventures on the web advises us “to think much more carefully about three things. First, the extent of information that we reveal and all the myriad ways in which it can be used. Second, whether the products and services we receive in exchange for our data are worth it, or whether the terms of the exchange should be reconsidered. And third, how governments may shift the rules of the new digital playing field, and what it will mean for capitalism in the 21st century.” “Tech’s fight for the upper hand on open data” October 9.

She might be right, but boy that is a big task. I get tired of even thinking I must get through all that.

My current day-to-day concerns are much more mundane, like that of being able to get the most of what I want out of the web, with my very limited attention span. Let us say out of the 180 minutes I might be on the web each day, I would be happy if I were not rudely interrupted more than 50% by distractions; like those fake-news that require so much self-discipline not to click. But the truth is that, for the time being, the robocalls I get on my cell and on my landline are much worse. These demand an immediate attention that the web does not.

There is though one aspect of this all that I have given a lot of thought; and that is on how all revenues generated by exploiting our own preferences should be distributed.

If I, as the owner of the intellectual property rights on my own preferences, cannot be duly paid a royalty for these, at least I do not want others to be able to exploit them for their own causes.

If 50% of all web revenues went to help fund a Universal Basic Income, perhaps that could be an acceptable compromise for me.

But back to our limited attention span, the major problem is that the marginal bothering cost for social media or other service providers to connect with us is zero. If each connection that does not originate from someone directly authorized by us is taxed with US$ one cent… then I am sure those connecting would at least think a bit more before bothering me.

And, of course, those taxes should also help feed a Universal Basic Income. The last thing we need is social media and redistribution profiteers teaming up in order to engage in mutually profitable crony statism. 

@PerKurowski

October 09, 2017

Wolfgang Schäuble, bank regulators imposed on Europe (and the world) a very dangerous risk taking austerity

Sir, Guy Chazan quotes Wolfgang Schäuble with: “Economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt. I myself am concerned about this, too”, “Schäuble says debt and liquidity levels endanger global economy” October 9.

If you put a risk-tax on sports, to cover for the societal costs of injuries, like a10 percent tax on cricket and one of 1 percent on croquet, would you not expect the result being many more playing croquet than cricket, with whatever implications that could have for the society in general.

That “accumulation of more and more liquidity and growth of public and private debt”, is made worse by the fact that this is being so distorted by the risk weighted capital requirements for banks; those which de facto are a subsidy to “The Safe” and a tax on “The Risky.

According to Chazan “Mr Schäuble also warned of risks to stability in the eurozone, particularly those posed by bank balance sheets burdened by the post-crisis legacy of nonperforming loans”. To me it is amazing to observe how regulators seem to concern themselves so much more with the ex ante perceived risks. than with the ex post realities.

And then Jim Brunsden Mehreen Khan and Guy Chazan write that though Wolfgang Schäuble “was an architect of the stringent bailout programmes carried out in Greece and elsewhere during the eurozone’s sovereign debt crisis, he insists the goal was never to impose austerity on Europe”, "Schäuble feels vindicatedby tough reforms in bailout nations"

Schäuble, being a German lawyer, could perhaps be personally excused, but all those economists and other technocrats surrounding him should have informed him that those risk-weighted capital requirements were imposing one of the most dangerous kinds of austerity, that of insufficient risk-taking.

“Insufficient risk-taking?” “Have you gone mad Kurowski?” “Have you not seen all the excessive risk-taking that took and is taking place?”

Not at all, it was, and is, excessive exposures to “The Safe”, like to sovereigns, AAArisktocracy and mortgages that caused the crisis. That’s more excessive risk aversion.

It is also insufficient bank credit to “The Risky” like to SMEs and entrepreneurs that allows so much QE and low interest rates stimuli to go to waste.

Sir, I strongly believe that Mr Wolfgang Schäuble would never pass my litmus test for the initial screening of a central banker or a regulator, but then again neither would you.

@PerKurowski

October 08, 2017

No one but a PhD or an MBA could have come up with the foolish risk weighted capital requirements for banks

Sir, Philip Delves Broughton in his “The business school tradition feels like an outdated Grand Tour”, October 7, refers to a book I am just to begin to read, Mihir Desai´s The Wisdom of Finance.

In that book Desai, writes about “how many of his MBA students avoid risk in order to retain their ‘optionality’... a concept they had picked up from finance… [but] often remain in companies saying to themselves, ‘Why not stay another year and create more options for down the road?’; ending up frustrated. The tool that was supposed to lead to more risk-taking ends up preventing it.”

Sir, I am not sure an option-searcher has ever in him to be a real risk-taker. That normally belongs to those who just close their eyes and jump at any opportunities in front of them. But, that said, I sure know of a tool that produces just the opposite. It was supposed to lead to less risk-taking, but ends up causing much more of it.

I mean of course to the risk weighted capital requirements for banks. By giving banks the incentives to create excessive exposures, holding the least capital, to what has always caused major bank crisis, namely what was ex ante perceived as safe but that ex post turned out to be very risky, instead of reducing the risks to the bank system, it increased it exponentially.

Broughton also refers to a book by Will Dean, It Takes a Tribe, in which the author holds that entrepreneurs learn by doing, while MBAs fail by over-thinking. Will Dean is by far not the first to argue such a thing.

My daughter Alexandra, an art fanatic, on hearing my explanation about the mistake of the Basel Committee, pointed me to “The forger’s spell”, a book by Edward Dolnick about the falsification of Vermeer paintings. Boy was she right! 

In that book Dolnick makes a reference to having heard Francis Fukuyama in a TV program saying that Daniel Moynihan opined: “There are some mistakes it takes a Ph.D. to make”. And Dolnick also speculates, in the footnotes, that perhaps Fukuyama had in mind George Orwell’s comment, in “Notes on Nationalism”, that “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

I am very happy with the MBA degree I received from IESA in Caracas 1974; but that does not stop me from being extremely disappointed with all MBA and Finance Schools all over the world, for not having been able to see, and much less stop, those regulations that are so dangerously distorting the allocation of bank credit.

Dolnick wrote: “Experts have little choice but to put enormous faith in their own opinions. Inevitably, that opens the way to error, sometimes to spectacular error.”

All of which leaves me with the problem that seemingly no ordinary financial reporters either, like those in FT, can really come to grips with believing, or even daring to believe, that experts could be such fools.

@PerKurowski

October 07, 2017

How a great bankers’ game show, got to be disastrously distorted by the Basel Committee.

Sir, I refer to Tim Harford’s interesting and fun article discussing probabilities based on Monty Hall’s ‘Let’s Make a Deal’ game shows: “Stick-or-switch inspires an onion of a puzzle” October 7.

In order to try to shed light on what I find so utterly disturbing with current bank regulations, let me then try use the example of an imaginary weekly-televised game among bankers, in which the contestants has to pick one of two boxes.

Box1 contains one 3 year $1 million loan to someone very safe at a very low interest rate.

Box2 contains one hundred 3 year ten thousand $ loans to many riskier borrowers but at much higher interest rates.

Which box would the banker contestant pick?

If he could analyze the second box in detail, the answer would clearly depend on if those higher interest rates seemed sufficient to cover the increased risk.

If the risk adjusted value at the end of the 3 years seemed the same for both boxes, or Box 2 produced only a slightly higher value, the ordinary risk adverse banker would surely go for “safe” Box1. Otherwise he would, he should, pick “risky” Box2, because that is precisely what bankers do… or at least did.

But that was not how bank regulators wanted that game to be played.

Considering bankers were not risk adverse enough, they wanted the contestants to pick Box 1 many times more and avoid Box2 much more; and to that effect they introduced risk weighted capital requirements.

That rule meant that if the banker picked “risky” Box2, while waiting for the 3 years result, he had to hold more capital (equity) than if he picked “safe” Box1.

As a result bankers would, from that moment on, prefer Box1 to Box2 much more; with what should have been expected consequences.

First to keep the game show going, many more boxes of the “safe” Box 1 type were needed, something that also meant the producers had to offer lower interest rates on the “safe” loans.

And in order to keep the audience interested, so that a Box2 had also a chance to be selected, the game show host also had to make sure to compensate the additional capital required, with still higher interest rates on the loans in Box 2; something which de facto made these loans even riskier.

What was the end result? Too many loans and too low rates were given to the “safe” and too few or at too high rates were given to the “risky”

For the bank system and for the real economy this was a disaster. Bankers would choke on “safe” loans to sovereigns, AAA rated borrowers or mortgages (causing crisis type 2007-8); and the economy would suffer from the “risky” SMEs or entrepreneurs lack of access to competitively priced credit (causing low growth).

Are we to appreciate these regulators interference? I don’t! 

@PerKurowski

October 06, 2017

The risk-weighted capital requirements, using Martin Wolf terminology, sound like voodoo Corbynomics.

Sir, Martin Wolf explaining, “Why has European social democracy been such a success?, [mentions the ] “government… must recognize the crucial role of incentives in shaping human behavior… [and] it must understand that the private sector, foreign as well as domestic, must play a leading role in the economy.” “The calamitous consequences of Corbynomics”, October 6.

I fully agree with that, but what I then cannot understand, is how Wolf is so utterly indifferent to the distortions produced by the risk weighted capital requirements for banks.

First, by allowing banks to leverage differently different assets, these create irresistible incentives for banks to finance what is perceived, decreed or concocted as safe; and to stay away from financing what is perceived as risky, like unrated SMEs.

Then by assigning a 0% risk weight to the sovereign it clearly states, loud and clear, that the government and its spending bureaucrats have the right to especially favorable bank credit, presumably because they allocate resources more efficiently than the private sector.

Sir, in Wolf terminology, that sure sounds like pure voodoo Corbynomics to me.

PS. The following link takes you to a litmus test all aspiring central bankers and bank regulators should take.

@PerKurowski

If I were Puerto Rican I would be on my knees thanking President Trump. I wish he did the same for Venezuela.

Sir, with respect to President Trump informing the markets they should wave “goodbye” to Puerto Rico’s outstanding $74bn bonds, Gillian Tett writes: “it is hard to argue that the foreign investors deserve much sympathy: they bought Puerto Rico debt precisely because this offered sky-high yields to compensate for equally high risks.” "Puerto Rico’s recovery depends on debt forgiveness” October 6.

Precisely, the creditors should not be able to eat the cake and have it too.

I have often argued that in any restructuring process one would not want lenders who lent to the sovereign at low rates, or acquired sovereign debt when no repayment problems were envisaged, bona fide lenders, to receive the same treatment as those lenders who lending at high speculative rates, perhaps even helped to create the crisis that demands a debt resolution.

And, nothing discloses the frontiers between bona fide and speculative debts better than the expected risk premiums when debts are negotiated. Perhaps any sovereign debt that reflects a risk premium that exceeds for instance by 4 percent the lowest interest rate paid for similar debt to other sovereigns, the speculative threshold rate, STR, should be classified as speculative sovereign debt, SSD.

And in the case of a restructuring of a sovereign debt, any creditor who entered in possession of his credit in conditions that would deem it to be a SSD, should have all interest received in excess of the allowed STR, automatically deducted from the principal.”

Would that work? I have no idea but at least it could help restrain creditors from financing sovereigns that have not earned the right to be financed.

PS. I wish President Trump would send a similar “goodbye” message to Goldman Sachs for financing the Venezuelan regime.

@PerKurowski

October 05, 2017

It’s hard to understand how central banks can favor so much safer biggies while making it harder for riskier smaller

Sir, Claire Jones reports “France’s central bank has bought bonds issued by LVMH, Bulgari’s parent company, helping lower the group’s borrowing costs. Under the terms of one of those bonds, LVMH can now pay an annual coupon of just 0.375 per cent to borrow until 2022. “Eurozone investment regains sparkle” October 5.

Unbelievable! How on earth can a central bank intervene and distort the allocation of credit to the real economy this way?

And to top it up, what is the capital requirement for a French bank when lending to LVMH or to Bulgari and what is it when lending to an unrated SME, that wishes to enter into the same market as these giants who can afford tens of millions of euros of investment?

Sir, is it only me that feels something is very wrong?

@PerKurowski

President Trump, Yellen could deserve a second term at the Fed’s helm, as long as she passes the following test.

Sir, you hold that based on “the three most important counts — views on monetary policy, attitude to financial regulation and Fed independence”, Janet Yellen is a better choice than Kevin Warsh, Gary Cohn and Jerome Powell to serve as Federal Reserve chair. “Yellen deserves a second term at the Fed’s helm” October 5.

You might be right, but if it was me who counseled President Trump in these matters, I would suggest he puts the candidates up to the following initial screening test:

Fact: Banks are allowed to leverage more with assets considered safe, like loans to sovereigns, the AAArisktocracy and mortgages, than with assets considered risky, like loans to SMEs and entrepreneurs.

So ask the candidates:

Does that mean “the safe” have even more and easier access to bank credit than usual; and “the risky” have even less and on more expensive terms access to bank credit than usual?

If the answer is no, disqualify the candidate.

If the answer is yes, then ask: 

Do you think that might dangerously distort the allocation of bank credit to the real economy?

If the answer is no, disqualify the candidate.

If the answer is yes, then ask: 

In terms of what can pose the greatest risk to the bank system, would you agree with Basel II’s risk weights of 20% for what is rated AAA to AA and 150% for what is rated below BB-?

If the answer is yes, disqualify the candidate.

If the answer is no, then ask: 

Do you agree with a 0% risk weighting of sovereigns?

If the answer is yes, the candidate should be classified as an incurable statist, not independent at all, and accordingly dismissed.

If the answer is no, President Trump could proceed applying any other criteria he wishes.

The way the world looks, being a lucky person seems a quite valid one.

PS. How many of those currently in the Board of Governors of the Federal Reserve System, would pass this test?

@PerKurowski

A Universal Basic Income would allow many at least some human time, so as not having to be full time androids.

Sir, Leslie Hook writes about Uber drivers having to work 24 hours a day, and feeling like androids, “FT Big Read. Uber: The view from the driving seat” October 5.

I have talked with many young bankers and heard they also, just like Uber drivers, feel a bit like androids; having just to automatically fill in many pre-ordained formulas, mostly just in order to reduce bank equity requirements, and never ever getting the chance of that so fulfilling opportunity of asking a client, “What do you intend to do with the money?” and thereafter deciding on whether recommend the credit or not to their superior.

But what can we do about it? Perhaps a Universal Basic Income would at least allow us to be half-time androids and half time humans.

What comes thru loud and clear from the article though is that we need lots of Uber and Lyft competing for our android services. Imagine being an android and having to serve a not too intelligent high-tech monopoly? That has to be as bad as it gets… sort of.

And of course we need new bank regulators.

@PerKurowski

October 02, 2017

Is banking regulation unfinished business? You bet, risk weighted capital requirements are still used

Sir, I have not read Tamim Bayoumi’s “Unfinished Business” yet, so for the time being I have to go on what John Authers writes in “A fresh way to learn from the financial crash” October 2.

From what I see the book seems in much like another example of Monday morning quarterbacking. For instance when it states “In early 2007 anyone in Wall Street would have said that naive European banks were the most enthusiastic buyers for dubious debt securities” we must really ask what is meant by qualifying European banks as naïve? These were AAA rated securities, these were the type of securities that their own regulators had just in 2004 with Basel II authorized the to leverage 62.5 times to 1 their capital with.

What we had (and still have) is amazingly naïve bank regulators… who for instance still allow banks to use their own models, as if banks were not interested in generating the largest risk adjusted returns on equity, something that, because of regulators, is nowadays foremost done by minimizing capital requirements.

It also says: “the US widened the collateral that banks could use in repo transactions [this] rule encouraged them to create mortgage-based securities, and “game” rating agencies into giving them undeserved strong ratings”. But that is wrong, or at the most, just a minor cause of the disaster.

Anyone who has taken time as I did to understand what had happened (I passed exams for real estate and mortgage intermediation licenses in the US for that purpose) would be clear on the following. The profit potential in securitization is a direct function of the quality difference between what is put into the securities, and what comes out. To be able to feed the sausage with subprime mortgages yielding 11 percent, and then because of AAA ratings be able to resell these (to Europe) at 6%, was a profit opportunity to big and juicy to miss.

Finally Authers comments: “Meanwhile, models resting on assumptions disproved during the crisis are still in use. There is indeed unfinished business.” Indeed, the risk weighted capital requirements are still used.

Sir, the first of about 50 letters I have written to John Authers since July 2007, more than a decade ago, ended with: “This all is lunacy and we are being set up for even bigger disasters and it must end, before it ends us. We need urgently to punish the regulators, at least on the count of being very naive.”

But clearly someone in FT did not want to hear my arguments, or at least not these coming from me.

@Per Kurowski

September 30, 2017

Canada needs a Universal Basic Income, 1st class robots and the smartest artificial intelligence, and to be daring

Sir, as a Venezuelan I am so lucky and so grateful for having two of my daughters and my two granddaughters living in Canada; and so of course I gave special attention to Tyler Brûlé’s “My plan to make Canada great again” September 31.

Except perhaps for that of “some form of national service with both defence and civilian functions”, and which because of my Swedish connections rang a bell with me, his other proposals left me quite indifferent.

I would instead suggest the following three things.

1. To prepare itself for the possibility of structural unemployment that could cause a breakdown of social order. This will probably require the introduction of a modest Universal Basic Income, a social dividend, and not paid by taking on more debt.

2. To gather all possible brain power in order to guarantee that future Canadians live surrounded and served by 1st class robots and the smartest artificial intelligence possible. Thinking of mine being dependent on anything lesser is just too horrible.

3. To immediately get rid of the risk weighted capital requirements for banks. These have banks staying away from financing the “riskier” future, like SMEs, and just keeping to refinancing the “safer” past, or basements in which to live. Risk taking is the oxygen of any development. God, make Canada daring!

PS. On Bombardier the following was my pro-Nafta tweet: “The fundamental question: Would Boeing build better airplanes in the future with or without competition from Bombardier? Keep the pressure!”

@PerKurowski

September 29, 2017

What extraordinary things since the crisis have central banks achieved? Having kicked the can down the road?

Sir, Alan Beattie writes: “By being prepared to embrace the radical in the face of ill-informed criticism… — central banks have achieved extraordinary things since the global financial crisis. It would be most peculiar if now, when the pressure on them has abated, they mistakenly returned to a model of monetary policy rooted in the pre-crisis era.” “Central banks have a duty to come clean about inflation” September 23.

Sir, since the global financial crisis have really central banks achieved extraordinary things for most? I am not so sure. In many ways it seems they have only dangerously kicked the crisis can forward, while leaving in place the regulatory distortions that caused the crisis

But indeed let’s come clean about inflation. What would the inflation be if:

Most stimuli had not gone to increase the value of what is not on the Consumer Price Index

If there had not been so much credit overhang resulting from anticipating demand for such a long time.

If there had not been an ongoing reduction in the costs of retailing much of what is recorded on CPI.

If non-taxed robots and other automations had not put a squeeze on costs

Then the inflation could have been huge… so what are central bankers so fixated on the CPI?

PS. What would the inflation be, if the I-phone was in the CPI? J

@PerKurowski