November 24, 2014

Perhaps the US shale oil producers should join Opec

Sir, in “A new chapter for Opec?” November 26, Anjli Raval and Neil Hume, describe Opec and the US shale oil-producers as competitors… and this though in many ways they share the same problem and perhaps would be better of as allies.

What problem? That the taxman, at least the Europeans taxman, needs, wants, and by means of taxes on gas (petrol consumption) gets more income per barrel of oil, than those who sacrifice that non-renewable resource forever.

What would the demand for oil be in Europe and other places if gas (petrol) was not such a handy product to collect taxes on? I don’t know how much higher it would be but, if I were one of those Opec ministers, I would certainly invite those shale oil producers for a little talk on shared strategies.

“Spaniards you will not have to pay Spain's debts, and you will not have to work too much” stinks pure cheap populism

Sir, Wolfgang Münchau writes “There is nothing controversial about the statement that if debt is unsustainable it needs to be restructured”, “The radical left is right about Europe’s debt” November 24.

Indeed, absolutely right. But then Münchau holds that Podemos of Spain “may be the one that comes closest of all those in the Eurozone to offering a consistent approach to post-crisis economic management”.

If a knowledgeable Münchau cannot differentiate between understanding the need of debt restructuring, and using that need in terms of haranguing “screw those capitalists”, in order to gain self interested power, then Europe is indeed in trouble.

Just two days ago Tobias Buck reported that Podemos’ European election manifesto included “a commitment to a 35-hour workweek, and to lowering the retirement age to 60”.

Does not “Spaniards, you will not have to pay Spain debts, and you will not have to work much” stink cheap populism?

November 23, 2014

With no ​​jobs to pay mortgages or utilities, at least we are living in great houses. Thank you bank regulators!

Sir, I refer to Tim Harford’s “Why a house-price bubble means trouble” November 22.

In it Harford writes “Booming housing markets attract bankers like jam attracts flies, sucking money away from commercial and industrial loans. Why back a company when you can lend someone half a million to buy a house that is rapidly appreciating in value?”

That is far from being the whole story.

Regulators, because they thought or wanted to think about the financing of houses as something absolutely safe, also allowed the banks to do it against very little bank capital, meaning very little equity… especially if someone managed to dress up the mortgages in AAA ratings.

And that allowed banks to earn much higher expected risk-adjusted returns on equity when financing houses than when financing the “risky” small businesses and entrepreneurs, those who could create jobs, and for which their regulators required them to hold much more equity.

And so here we now find ourselves… living in expensive houses with too few good jobs to allow us to pay the mortgages and the utilities. Is that not sort of bad planning?

November 22, 2014

Pablo Iglesia’s offer of a 35-hour workweek and a retirement age of 60 in Spain, sounds more like a “No-podemos”

Sir, I have surprised read Tobias Buck reporting that Pablo Iglesias, of Podemos (we can), suggests “a 35-hour work week and lowering the retirement age to 60”, “Spanish upstart party challenges status quo”, November 22.

Sincerely, in a so job starved Spain, that sounds to me much more like a giving up, like lets share the leftovers, like a defeatist “No-Podemos”.

If that is what Spain wants, then Spain is truly in big trouble.

I hope Spain understands that speaking engagingly, emotionally and with great empathy of the problems of a nation, has absolutely nothing to do with the capacity of solving those problems, on the contrary, these are often worsened by experts in verbal populism. (See: Venezuela)

If I was a Spaniard, and a bit similar to Churchill’s “Blood, sweat and tears”, I would now be arguing: “We can (nosotros podemos) and must get out of this sorry mess, and make Spain great again, even if that takes a 60 hours working week and forces us to work until we’re 100”.

PS. When an Executive Director of the World Bank, 2002-2004, it was a great honor for me to be sitting in the chair which represented, among others, Spain and Venezuela.



La oferta de Pablo Iglesias de 35 horas de semana laboral y 60 años para la jubilación, me suena más a un ¡No Podemos¡ 


Señor Editor, sorprendido leí a Tobias Buck informando que Pablo Iglesias, de Podemos, sugiere "una semana laboral de 35 horas y la reducción de la edad de jubilación a los 60", "partido advenedizo español desafía status quo", 22 de noviembre. 

Sinceramente, en una España tan  hambrienta de empleos, eso me suena mucho más como un abandono, como a un vayamos a compartir las migajas sobrantes, como a un derrotista "¡No-Podemos!". 

Si eso es lo que España quiere, entonces España esta realmente en serios problemas. 

Espero que España entiende que el poder cautivar hablando con gran empatía de los problemas de una nación, no tiene absolutamente nada que ver con la capacidad de resolver tales problemas, por el contrario, éstos son a menudo agravados por los expertos en populismo verbal. (Ver: Venezuela) 

Si yo fuese español, y algo similar a lo de "sangre, sudor y lágrimas" de Churchill, yo estaría ahora argumentando: "Nosotros sí podemos y tenemos que salir de nuestra triste situación, y hacer de España de nuevo grande y fuerte, incluso si esto nos obliga trabajar 60 horas por semana hasta los 100 años". 

PD. Cuando fui un Director Ejecutivo del Banco Mundial, 2002-2004, fue un gran honor para mi estar sentado en la silla que representaba, entre otros, a España y a Venezuela. 

Has ECB and Draghi read Piketty and now want to impose a wealth tax on Europe’s piggy-banks?

Sir, Claire Jones reports Mario Draghi said that the ECB would “do what we must to raise inflation and inflation expectations as fast as possible, “Dovish Draghi raises hopes for more ECB stimulus” November 22.

And since the ECB is aiming at 2 percent inflation that would be equivalent to a 2 percent wealth tax on all the piggy-banks in Europe. Has ECB and Draghi understood Piketty a bit too much?

Frankly, in a Europe with such problems like that banks are effectively restrained by crazy regulators from lending to medium and small businesses, entrepreneurs and start-ups, those tough risky risk-takers that Europe so urgently need to get going, to then hear all this talk about inflation as an overriding minimal requisite for a solution, should make all a bit nervous… specially the poor (and the piggy-banks) who always end being those most taxed by inflation.

November 21, 2014

The problem with the Nordic model is that bank regulators have tampered with it

I refer to Richard Milne’s “Nordic model starts to creak under pressure” November 21.

Sir, suppose you were a development minister of a country like Sweden that has thrived on entrepreneurship, much of it financed by banks.

And then your bank regulator, Stefan Ingves, tells you that, in order to make the Swedish banks safer, he and his colleagues in the Basel Committee, is now going to allow banks to earn much higher risk-adjusted returns on equity when lending to those perceived as “absolutely safe”, than when lending to those perceived as “risky”.

What would you do? What should you do?

You should of course shout: “No! Over my dead body! Favoring in such a way what seems ex ante to be very safe, means that medium and small businesses, entrepreneurs and start-ups, “the risky”, will no longer have fair access to bank credit… and that is too dangerous… even for the banks.”

Unfortunately, those responsible for the economic development of most countries have not yet understood the consequences of the credit risk weighted capital (meaning equity) requirements for banks.

And so before Sweden remembers that risk-taking is the spark that ignites all development and keeps the economy moving forward, it will be stalling and falling.

And that goes of course for all countries that find themselves under the thumb of senseless bank regulators.

November 20, 2014

The response to monetary stimulus must be different in totally different banking systems

Sir, we have had two complete different worlds of banking.

One when banks decided to whom they would lend to and at what interest rates and what terms, based on what they perceived the credit risks to be.

The other word, the quite recent one, is one in which regulators intrude and distort the allocation of bank credit by declaring that also the bank capital, meaning equity, banks were required to hold should also be based on perceived credit risks.

And that of course increased the risk-adjusted returns on equity for banks when lending to the “absolutely safe” making lending to the risky, like small businesses and entrepreneurs, something much less attractive.

To think that the economy would respond in the same fashion to various economic stimuli with such different bank systems is quite idiotic.

And Sir, that is why, when reading Richard Milne’s “Stockholm syndrome”, November 20, about the Swedish Riksbank’s crisis-fighting measures, and where there is even a reference to 1937, I find that discussion to be so completely out of context.

It states: “‘Sadomonetarist’ rate rises led to a toxic bout of deflation and criticism from economists.”

If anything, in that respect, what we really have is sadistic risk adverse regulations.

November 19, 2014

ECB’s Peter Praet, seemingly solidary with deep-rooted pessimists, has no moral right to speak out against pessimism.

Claire Jones reports that Peter Praet, the member of the ECB’s top-ranking executive board responsible for economics said: “what worries me the most is that you have a sort of longer-term growth pessimism filtering through to expectations, and authorities in general have to be very attentive to this”, “ECB warns of ‘pessimism’ threat” November 18.

Frankly, are not capital requirements for banks based on perceived credit risks, and which are designed to make banks avoid taking risks on the “risky” and limiting themselves to financing the “absolutely safe”, an expression of profound pessimism? Of course it is. Optimism is equivalent to let’s go for it, even if its risky. And that is what Europe needs.

But, the problem Praet might have is that it must be difficult to discuss the distortions in credit allocation that that bank regulation causes, if your boss, Mario Draghi, as the previous chairman of the Financial Stability Board, is one of the most responsible for it.

My answer to Praet would be: You have to decide whether the future of your children and grandchildren is more important than yours. It is as easy (and as hard) as that!

The Parable of the Talents and the self inflicted curse of excessive regulatory risk aversion.

Sir, we live in a world where those who are perceived as “risky” from a credit point of view; those who always include small businesses and entrepreneurs; those who with their dynamism help to seed the future of an economy, are negated fair access to bank credit. And that is done by means of regressive and distorting bank regulations that allow banks to hold much less capital, meaning equity, against assets perceived as absolutely safe.

And tragically, that is not deemed to be a problem, like we can for instance see when reading Martin Wolf’s “The curse of weak global demand” of November 18. In it, as usual, this central problem is not even mentioned

Of course the world has many problems but since risk-taking is the oxygen of any development, one of the most serious one is the self-inflicted curse of excessive regulatory risk aversion.

I was recently reminded of “The Parable of the Talents”, Matthew 25:14-30 and we would all be well served if regulators read it and understood it. We the taxpayers are underwriting many of the risks in banking, “the Talents”, which we hand over to regulators to manage, and we do not do that just in order for banks to obtain higher returns on equity or to only lend to those perceived as absolutely safe. We do that so that banks can allocate credit efficiently, and daringly, to the real economy.

November 18, 2014

The Fed’s regressive bank regulations, makes it a biased source of information

Sir, Tom Braithwaite’s writes that “stock and bond prices for the banks would be more accurate if [the market] knew what the Fed thought about the strength of these banks and their management”, “Smoke needs to clear over Fed supervision of US banking system”, November 17.

Indeed, that sounds extremely rational but, unfortunately, if the views of the Fed are biased, the signals it sends out will of course make it worse for the economy as a whole.

I say this because it is clear that the Fed agrees with regressive regulations which much favors bank lending to the infallible, in detriment of lending to the risky, and so opining based on such mistaken criteria cannot lead to anything good.

Just look at the “Camels” ratings that Braithwaite refers to and that many want to be disclosed. These cover “capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk”; with no indicator for what is most important for the real economy, and thereby implicitly in the medium and long run is also vital for the banks, namely if the bank allocates credit efficiently to the real economy.

And so, even if in the land of the free and the home of the brave, the Fed would rate much higher a bank that exclusively lends to the sovereign and the AAAristocracy, than a bank that dares lending to “risky” citizens and their small businesses. And if that helps anyone, that might be those very elderly in want of short-term safety, and clearly not the young who need banks to take risks in order to have a future.

And what is really hard to understand is when Braithwaite refers to Jose Lopez, an economist at the Federal Reserve Bank of San Francisco, opining in 1999 that the disclosure of Fed’s Camels ratings “could benefit supervisors by improving the pricing of bank securities and increasing the efficiency of the market discipline brought to bear on banks”. Does the Fed need the market to reassure it by reaffirming the Fed’s own biases? Is it not doing enough damage as is?

November 17, 2014

I agree 100 percent with Christian Clausen of Nordea, in his description of 50 percent of the problem with SMEs and bank capital/equity.


In there Christian Clausen, chief executive of Nordea and president of the European Banking Federation, is quoted saying: “Ever-increasing capital demands of regulators meant banks needed to charge a margin of 6-7 percentage points to small and medium-sized enterprises (SMEs), companies which are often seen as the backbone of the EU economy. Show me an SME that can do a business case on opening a new factory or doing an investment where they can start by absorbing 600-700 basis points on margin. In this environment, it’s not possible."

And Clausen asks: "Don’t you want to allocate risk capital to the young entrepreneurs and the companies that can grow and export and create jobs? We have gone too far. Why on earth as a politician do you want to allocate the limited amount of risk capital in your society more than necessary to the banking sector? Don’t you want to allocate risk capital to the young entrepreneurs and the companies that can grow and export and create jobs? We will not create more jobs by piling up more capital, we will create negative growth because our lending costs will go up.”

Absolutely, Clausen is 100 percent correct, but unfortunately that is only in 50 percent of the story.

The other 50 percent is: Why would bank regulators require banks to have more capital when lending to SME’s, the backbone of the economy, than when lending to for instance those who possess an AAA rating or lending to an “infallible sovereign”.

Is it not so that much of the higher margin banks now need to charge SME is a direct result of the low margins they charge when lending to the “absolutely safe” because these are subsidized by the very low capital requirements that then apply?

My rephrased Clausen questions would be: Why on earth as a politician do you want banks to consume more of the limited amount of bank risk capital in your society when lending to the risky that when lending to the safe? Do you really want to discriminate against the fair access to bank credit of the young entrepreneurs and the companies that can grow and export and create jobs?

​Do you really want your banks financing the riskier future settling instead for refinancing the safer-past?

Sir, for the real economy, a stress test of banks, which analyzes only what is on the banks’ balance sheets, and ignores what should have been on these, is a useless test.

PS. Yesterday in church I was reminded of the “The Parable of the Talents”. It would do us much good if bank regulators read Matthew 25:14-30

The mission statement for our banks as decreed by its regulators does not make any sense.

Sir, Sebastian Mallaby writes: “Banks are underwritten by taxpayers via deposit insurance as well as the too-big-to-fail safety net; they need to be reined in, and if they shrink, so be it”, “Stringent rules for hedge funds make the financial system fragile” November 17.

Indeed but, why are banks underwritten by taxpayers? What are banks supposed to deliver in return?

The current mission statement imposed by regulators on banks, by means of credit risk weighted capital requirements, seems to be that of lending more and cheaper than normal to all those perceived as “absolutely safe”, and to stay away from lending to the “risky”. Is that what we want? I don’t think so. If it were, there would be no reason for us to underwrite anything.

For example the: “We the people underwrite the banks so that these can lend more and cheaper to our "infallible" sovereigns… in the hope that doing so we don’t have to pay taxes”… sounds more like underwriting the sovereign than underwriting the banks.

No, I believe we taxpayers agreed on underwriting the banks so that these would be better equipped to take on the risks of lending to all those risky small business and entrepreneurs we all know should get credit, so that the economy grows and as a result we all are better off. That was the quid pro quo!

And Mallaby also writes: “Regulators need to remember that financial risk will not go away… there will be difficult judgments about how capital should be allocated. So there has to be a theory of where this risk can best be housed. If hedge funds are part of the answer, regulators make the world less safe by clamping down on them.”

Absolutely, if not the banks, then who is going to house the risk-taking we support and that most of the world, not understanding the regulations, still think is housed in the banks?

November 16, 2014

To hinder what‘s senseless and insensible to trend, we need strong globalized social sanctioning

Sir, Gillian Tett asks: “Can sensible ever ‘trend’?”, “The battle for political sense and sensibility”, November 15.

In these days of information overload, when no one has time to digest what they hear, read and see, and only have time to file it in black or white, or right or wrong cabinets, that is indeed an extremely important question.

Unfortunately, for the time being, it has to be answered with an “on its own, without assistance No!”

With respect to justice I have for long argued that more than fighting for justice, which places us on the route to something infinite, where we never really know where we find ourselves, it is much more effective to fight against the injustices, which are easier to define.

In the same vein, instead of trying for sense or sensibility to trend, let us at least start by making sure that what’s senseless and insensible cannot trend.

As a minimum it behooves the world to find credible instruments that can shame out some of the complete senseless and insensible falsehoods that, floating around on the web, causes real idiots to believe they have confirmed grounds to believe in their idiocies, and give them instruments to advance these, and so create legions of fools.

Is that easy, or even possible? That is an irrelevant question, it has to be tried.

Would that be censorship? No, much more like social sanctioning… on a global scale.

November 14, 2014

Regulators frightened by innocuous credit risks are concerned with banks worrying about dealing with money launderers.

Sir, Martin Arnold reports on “growing concern among regulators and politicians about increased risk aversion by banks, which have reacted to a regulatory crackdown and a string of big fines for misconduct by severing links with riskier clients”, “Financial task force warns on banks’ approach to de-risking”, November 14.

Sounds like a cruel joke. Regulators who demonstrate huge risk-adverseness based solely on credit risk perceptions, are now expressing concerns with that banks might be to risk adverse when dealings with clients who could fit the profile of money launderers and terrorist financiers.

The bank regulatory risk weights explain much of a growing lack of productivity.

Sir, I refer to Martin Wolf’s “Hope for the best on productivity, but prepare for the worst” November 14.

Here is a list of risk weights applied by bank regulators apply, even though banks already adjust for perceived credit risk by means of interest rates, size of exposure and other contractual terms.

Infallible sovereigns: 0 percent.

Members of the AAAristocracy: 20 percent

Financing of houses: around 30 percent

Medium and small businesses, entrepreneurs and start-ups: 100 percent.

Sir, do you think that risk weighting is compatible with a banking sector that can effectively help to finance increased productivity? I don’t. Martin Wolf seems to think there is no linkage.

Regulators are negating our descendants the freedom of risk taking by banks that brought us to where we all find ourselves. That is shameful... and useless. Lending to medium and small businesses, entrepreneurs and start-ups have never been the direct cause of any real large bank crisis.

November 13, 2014

With Portfolio Invariant Perceived Credit Risk Weighted Equity Requirements for Banks, Europe, the whole G20, is doomed.

Sir I refer to the reports and warning about Europe’s economy, November 13.

As long as regulators insist on using Portfolio Invariant Perceived Credit Risk Weighted Equity Requirements for Banks, Europe, in fact the whole G20, is doomed.

What more can I say that I have not already explained to you in more than a 1600 letters about what these regulations with their misguided credit risk aversion cause, and that you prefer to ignore?

November 12, 2014

The environmental problems of our planet are too serious to be allowed being sequestered by unethical vulgar politics

Sir, Martin Wolf’s “An unethical bet in the climate casino” of November 12, exemplifies exactly the main obstacle for the world to start tackling in real problems related to climate change, or, if you wish, problems related with just bad handling of our environment. And that is that the to do or not to do so, is always politicized.

Just read: “The Republican victory in the midterm elections was a triumph for its strategy of sustained vilification of the president and obstruction of his policies. The most important consequence of this election may therefore be to bury what little hope remained of getting to grips with the risk of dangerous climate change.”

I know that when my grandchildren would ask me “Grandfather why did you not do anything” this article of Wolf will, with much sorrow, come in handy.

“Many Republicans seem to have concluded man-made climate change is a hoax.” Does Wolf really think they have concluded that… and not just concluded something political?

“Yet, fascinatingly, the very same people who consider the costs of mitigation excessive wish to lighten financial regulation and so increase the risk of a repetition of the recent calamity… It is no accident that believers in laisser faire are the fiercest climate sceptics. The wish is father to the denial.”

Hold it there! I just know that if the tackling of climate change was to fall into the hands of something like the Basel Committee for Banking Supervision, and the Financial Stability Board, which with their portfolio invariant credit risk weighted capital/equity requirements for banks caused the current crisis… then our planet would be definitely toast L


FT, McKinsey should it not be: Piketty “Winner of the 2014 Book Business of the Year Award”?

Sir, you, FT states that: “The prize will go to the book that is judged to have provided the most compelling and enjoyable insight into modern business issues.”

Sir, even though during 15 years I was a columnist at Venezuela’s most important paper, until I was expelled by the new pro-government owners, I never considered myself to be a journalist, so I would not know what to do as an FT journalist, if seeing FT approving of Thomas Piketty’s “Capital in the Twenty-First Century” as the “Winner of the 2014 Business Book of the Year Award”.

But, as a consultant, and if a consultant of McKinsey & Company, I would feel much ashamed and would most certainly resign, immediately.

Of course unless all was just a monumental typo and what was really intended was: “Winner of the 2014 Book Business of the Year Award”… with that price I could agree since it must have made Thomas Piketty a quite rich man.

PS. Enjoyable? From what I hear, in number of pages not read by its buyers, this book might go for a Guinness record... hardly something compatible with enjoyable.

November 11, 2014

Lord Turner, if a helicopter is to drop money, then drop it on the citizens, who are those who will have to pay for it.

Sir, not only does Bank of England buy huge amounts of government bonds; and banks do not need to hold any equity against these bonds, so they are also big buyers; and new bank liquidity requirements will also favor them holding sovereign instruments.

But now Lord Turner, to top it up, also wants to make a Friedman helicopter drop of money, on the government, on its bureaucrats, to finance a special one shot deficit, “Print money to fund the deficit – that is the fastest way to raise rates” November 11. He really must adore government!


I have no problem with the concept of a helicopter drop (I have a gold hedge) but, if something goes terribly wrong, and run inflation results, it will be the poor who suffer the most. And so I would suggest dropping that money directly on the British citizens.

Lord Turner explains the “current mess” in terms of “excessive private sector credit growth”. Indeed, but let us not forget that, as a bank regulators, by allowing the outright stupid credit-risk-weighted capital/equity requirements for banks, was himself much guilty of that. 

That regulation caused banks to leverage their equity to the skies; completely distorted the allocation of bank credit in the real economy, and, by favoring “the infallible” and discriminating against “the risky” is also a driver of growing inequality. 

And we are to trust them?

PS. If we know that inflation is primarily a tax on the poor, then why is deflation so bad for the poor?

The bank regulatory assassination of the real economy and of opportunities, is about to get much worse with FSB’s TLAC


The Financial Stability Board announced that: “the basic total loss-absorbing capacity requirement (TLAC) would be in the range of 16-20 percent of a bank’s risk weighted assets.”

That means that when lending to for instance one of the AAAristocracy who carries a risk weight of 20%, the bank will need to hold 4% in TLAC.

But, when lending to a small business, which carries a risk weight of 100%, then the bank will need to hold 20% in TLAC.

This will of course mean that banks will lend too much to “the infallible” at too low interest rates; and will stop lending to small businesses and other “risky”, unless at extremely high relative compensatory interest rates.

And that means in effect the regulatory assassination of the real economy will worsen.

Mark Carney, the FSB chair, holds that this will help to avoid the need for taxpayers to pay out in the case of any bailout. Perhaps, but way before taxpayers pay, perhaps inflation willing they even never will pay, others are paying.

Mark Carney mentions the subsidy in that “the public purse backstops these banks” Indeed…so let him answer us… who gets the most of that subsidy… “the infallible” or “the risky”?

In case of the need for a bailout, that which most often happens when some huge exposures to something perceived as absolutely safe turn risky, why should those perceived as “the risky” have had to pay for the cost of 20 percent of TLAC while “the infallible” only pay 4 percent of it?

And the worse cost of all, to be paid primarily by the future generations of unemployed, are all the opportunities that will never be realized because of lack of bank credit. And that will of course only increase inequalities.

I must say it… Damn these bank regulators who clearly only care about the short term health of banks, and do not give one iota about the real economy.

How can bank regulators deny their children the risk-taking by banks that benefitted them?

PS. And of course, the zero risk weighted infallible sovereigns are the biggest beneficiaries of the public purse backstop of banks subsidy, because, in their case, the required TLAC is zero! How can our bank regulators be so shameless?

November 10, 2014

Economic stagnation is doomed to happen as a consequence of credit-risk-weighted capital/equity requirements for banks.

Sir, Wolfgang Münchau holds that secular stagnation in the Eurozone is very probable “The euro is in greater peril today than at the height of the crisis” November 10.

It is worse than that, stagnation is doomed to happen, as a result of credit-risk-weighted capital requirements for banks that impede the access to bank credit of many who though “risky” would provide the new sources of growth Europe needs to move forward.

Frankly, where does Wolfgang Münchau believe his Europe would be had these risk-adverse regulations been adopted some two hundred years ago?

Again: Europe is denying its children the risk taking it took for the European parents to prosper. Shame on it!


November 09, 2014

Would you really want to survive in a world if that requires you acts that are inhuman beyond description?


I am not a Jew, but my father, as a polish soldier was on the first train of prisoners to Auschwitz, where he spent years having to photograph many horrors. And my father, after the war, was also able to arrive to Sweden, about or even the same day as Rosenberg’s father… and where he met my mother. And I recently read this book in Swedish, and was equally moved by it.

But for me, the most nerve-breaking part of the book is the description of how in the Polish ghettos a Jewish Council had to wrestle with the decision to elaborate or not, a list with names of thousand of children and grandparents to be delivered to the Nazis, to certain death, in order for some to have a chance to survive. In the Lodz ghetto they did that, and Rosenberg and many other survived. “Would you really want to survive in a world that can require you do that?” is a haunting question that will stay with you.

Tim Harford, where would Britain be if since Jane Austen’s days equity requirements for banks had been risk-weighted?

Sir I refer to Tim Harford’s "A passport to privilege" November 8. 

It is an extraordinary article that brings a new perspective to the important discussion on inequality. And Harford limits it clearly and adequately to “financial inequality” because, in terms of inequality of privileges, I have always thought of that much more a local issue so as to be comparable on a global scale. 

For example the even temporarily inequality of privileges I felt when young, and it was my brother’s birthday, and he got celebrated, was not much diminished by the fact I was given a consolation gift and I knew my own birthday was less than two months ago.

But that said, as usual, mono-thematically, let me return to my concerns about current bank regulations.

I suspect that the referenced FT personalities, Gillian Tett, Simon Kuper and Tim Harford himself, have incomes in a range comparable to that of Mr Elizabeth Bennet and Mr. Darcy, and so let me ask them the following:

How much passport derived privilege do you think you would have today if Britain, during Jane Austen’s days had adopted bank regulations that were based on subsidizing bank lending to what then was perceived as absolutely safe… and with that creating a toll on bank lending to those perceived as risky”? Regulations that among others stipulated banks needed zero equity when lending to “Infallible” King George III :-)

Are you really not aware you are negating your children the rights to all that risk-taking that brought you to where you are today... passport-wise?

November 08, 2014

Is Commerzbank earning more on small and medium sized companies because of more lending or higher interests?

Sir, I refer to Alice Ross’ “Commerzbank buoyed by rise in core lending” November 7.

I was pleasantly surprised when reading of “a rise in operating profits… in the core bank, which includes lending to private customers and Germany’s small and medium-sized companies, the Mittelstand.”

But, since I do not understand how banks can lend to that type of clients, as that requires them to hold more equity, perhaps that does not signify more lending but rather that these borrowers are more desperate for credit, and therefore accept paying interest rates which are higher than their riskiness merits.

It would be great if Ross takes this opportunity to deepen an analysis of what really is happening with the access to credit of these "risky" bank clients.

November 07, 2014

Europe, having ECB injecting liquidity instead of banks, is indeed a real recipe for disaster or waste.

Sir I refer to Claire Jones’ “Draghi’s go-it-alone style off the menu” November 7.

ECB “has announced that four private sector asset managers will begin buying asset backed securities on its behalf starting this month.”

Why does ECB trust more that will inject liquidity better in Europe’s economy than banks allowed to do so freely without regulatory distortions?

That question reveals the real dilemma. The credit-risk-weighted capital/equity requirements for banks, impede these to allocate credit efficiently and so bureaucrats, whether outsourced or not, who put absolutely no money at risk, have to step in and do the lending.

Europe, that is indeed a real recipe for disaster. In this case it is better for you that ECB sends a small check to each European, for a loan at .1% interest, payable in 20-30 years. Who knows, ECB might even recover more of its money doing so… at least in nominal terms.

November 06, 2014

FT why do you not care for who really pays for current bank regulation presents?

Sir, LEX writes “previous banking conflagrations show that in good times regional banks like to pile on leverage almost as much as big ones”, “Bank regulation: no presents yet”, November 6.

But of course! I can understand that comment being made by a small local paper but… by FT? Is it not self evident that the duty of any bank manager is to provide the highest risk adjusted returns for their shareholders (and for their own bonuses)?

And does he not achieve that by piling up on assets like those perceived as “absolutely safe”, and which regulators have blessed with ultra-low capital/equity requirements, meaning ultra-high leverages?

And talking about regulatory presents to banks… why Sir, is FT seemingly not at all concerned with who really pays for those presents?

The high risk adjusted returns on bank equity are directly paid for by those perceived as “risky” borrowers, by means of higher relative interest rates or much less access to bank credit and, in the final count, by the economy, and by the young who as a consequence will face unemployment. Is that too difficult for you to understand?

And don’t give us that b.s. of the taxpayer paying… what he needs to pay for are for the excessive bank exposures created to something ex ante perceived as “absolutely safe” and that ex post turns up to be very risky.

November 05, 2014

What would Luke Johnson, Richard Branson, President Reagan and Lord Keynes say about Basel Committee’s risk aversion?

Sir Luke Johnson refers to that if entrepreneurs such as the Virgin founder, Richard Branson “did not take big gambles, society as a whole would be worse off” “The Virgin Galactic crash and the need for risk-takers” November 5.

And Johnson also writes: “pride and arrogance are required if the status quo is to be challenged with radical new ideas; after all, weak characters give up too soon – harried by regulators, safety obsessives and the overcautious. Change is never easy, but it must be embraced unless we want a life of stagnation and retreat.”

And he quotes President Reagan in that: “The future doesn’t belong to the fainthearted; it belongs to the brave”, and John Maynard Keynes in that: “If the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.”

Well contrast all that to the fact that current bank regulators, with their credit-risk-weighted equity requirements, are telling the banks that if they lend to what is perceived as absolutely safe, then they will be able to earn much higher risk adjusted returns on equity than if lending to what is perceived as risky.

I am doing what I can, but FT, how is it that you cannot find it in yourselves to protest regulations that slowly but surely, creating artificial risk-aversion, are killing our economies and perhaps even our civilization?

For some of us the gold of Venezuela, in Venezuela, even though worth less, is pure profit

Sir FastFT refers to the losses derived from that “Hugo Chávez… no fan of what he called the “dictatorship of the dollar”, and forced the central bank to hold most of its reserves in bullion rather than greenbacks.”, “Venezuela faces double blow as gold and oil prices slide” November 5.

But what the report misses is that Hugo Chávez forced the central bank to hold most of that gold… in Venezuela! That made these reserves much less operative, much less negotiable… something many of us who despair to see so many resources being dilapidated in our country, find not all that bad.

In February 2012, in an article published in El Universal I wrote: "I must express great satisfaction with the arrival of our gold to Venezuela, at least what came was saved, at least for the time being. Where that gold was stored it could easily disappear, in a flash, with the government just writing a check."

PS. After writing for El Universal for 14 years in July 2014 I was one of the first four censored by the new pro-government owners. (So you see FT is not alone in its opinions of me :-))

November 04, 2014

Bank nannies decided banks should avoid risk and solely play it safe, and thought nothing bad would come of that

Sir, I refer to John Stroughair’s letter “Stress test assumptions were not particularly stressful” November 4. In it he writes:

“The current weights enshrined in the Basel formula, which give preferential treatment to sovereign debt and residential mortgages [to which I would add the AAAristocracy], may make sense at the individual bank level. But at the level of the banking system they lead to a gross misallocation of credit, in particular to the excessive holdings by banks of supposed risk-free sovereign debt and to the fact that less than 10 per cent of the loans made by UK banks support productive businesses.

What is needed is a genuine debate regarding how we can move forward to regulation that will mitigate systemic risk and possibly even nudge the industry to support gross domestic product growth rather than house price bubbles.”

As you understand from my more than 1.000 letters to you about precisely this issue and this concern, I wholeheartedly agree with Stroughair.

One day it is going to be clear for all what our bank regulators, with their risk aversion did to our economies and to our society

In real terms they acted similar to as if educators decided to evaluate children better for dedicating themselves to playing piano, only because they think that is safe, than for engaging in sports they perceive as risky… and thinking that our society would be better for that.

Fed needs to make up its mind fast, because now it is really creating confusion about the banks.

Sir, I refer to Gina Chon’s and Tom Braithwaite’s “US and European lenders raise fears over ‘living will’ cash reserve demands” November 4.

In it is reported that banks that face a liquidity crunch can currently tap the discount window as part of the Federal Reserve’s lender of last resort programs, but, that in the process of preparing their ‘living-wills’, they have been told not to assume continued access to it.

What? The Fed now allows banks a 5% leverage ratio, which implies a mind-boggling 20 to 1 authorized leverage of equity… and yet now they want to retire their lender of last resort support? It better makes up its mind fast… because now all we others are becoming really confused. If we are not able to count on big strong Fed to help out, then there is no way we small weaklings can allow banks to leverage that much.

November 03, 2014

Forget the liquidity trap, Europe is mostly trapped in a regulatory trap.

Sir, Martin Sandbu opines that “we should take issue with the idea monetary policy has done as much as it can”, “Central bankers are ensnared in a trap of their own imagination” November 3.

And Sandbu believes ECB must “buy anything – but whatever you do, buy something” in order to get inflation going, in order to make real interest rates negative… “if that is what the economy needs fully to employ its resources”.

That sounds desperate and extremely dangerous… because that sounds like a recipe not necessarily for getting inflation going, but for the markets to lose their trust in the ECB, but more importantly so in the Euro.

But of course central bankers are ensnared in a trap, not even of their own imagination, but of their own doing.

Forget about liquidity trap when the real problem is a regulatory trap that stops liquidity from going to where it should be going in the absence of the trap… and current credit-risk-weighted capital requirements for banks do just that.

Sandbu writes that ECB “typically changes the money supply by offering loans to banks rather than buying financial assets – making monetary expansion dependent on banks’ willingness to take up the offer.”

So? Why does not ECB better push regulators into using a simple non-distortive leverage equity ratio for all banks independent of their assets… and then inject billions in preferred shares into the European banks? Those shares could have a clause making them redeemable in 30 years time.

That way, the day after, banks could at least again lend to the medium and small businesses, entrepreneurs and start-ups, something they cannot currently do because of an outright stupid suicidal bank regulation.

November 02, 2014

One might need rats to smell out the rat in bank regulations.

Sir, Tim Harford refers to a paper published by Ben Vermaercke of the University of Leuven and four colleagues titled “More complex brains are not always better”, which “showed that rats were better than humans at distinguishing certain kinds of striped patterns from others”, “Trading places – with a rat” November 1.

So would Vermaercke and colleagues think that rats could be better than bankers at clearing that Basel Committee fog made up by credit-risk-weighted equity requirements for banks and which makes it so hard to navigate the financial valleys? 

If they were to ask trader-rats trainer Michael Marcovici, he might say no. That because his training method requires financial data to be converted into piano music, and the distortions of such bank regulations might cause just a bit too much dissonance.

But, then again, who knows, perhaps one might need rats to smell out the rat in bank regulations.

If we want debt to earn the credit it merits, we need to get rid of current bank regulators.

Sir, I refer to Nigel Dodd’s, a professor at LSE, “Cast aside the moral judgment and give debt the credit it deserves”, November 1.

Unfortunately it seems that professor Dodd has not heard about the arguments against odious and stupid bank regulatory discrimination based on perceived credit risks. Had he done so, I believe his article would have taken a different form.

I say this, especially when reading his conclusion: “Credit is morally neutral. As an institution, it is neither good nor bad; and it is a grievous error to confuse creditworthiness with moral probity. Credit should be available to those who need it most. The price should be reasonable, and it should entail neither stigma nor penury.”

Indeed, professor Dodd, but one of the most important reasons for why this is not so, is the bank regulations that have been in place for about three decades; most especially since Basel II was approved in June 2004.

Those regulations order the banks to hold much more equity when lending to those perceived as “safe” than when lending to those perceived as “risky”; which of course allows banks to earn much higher risk-adjusted returns on equity when lending to the safe, than when lending to the risky.

And that means that regulators, on their own, without our approval, decided that bank credit should primarily be available to what from a credit risk point of view was perceived as “safe”, like financing house purchases, or lending to “the infallible sovereigns” or to the members of the AAAristocracy.

And which also means that anyone perceived as “risky”, would have to pay even more risk premiums, or have even less access to bank credit.

And that means denying fair access to bank credit to those we, who depend the most on the real economy, most need and want should have fair access to it, like the medium and small businesses, the entrepreneurs and the start-ups.

If we want debt to get the credit it deserves, we need to get rid of these regulators.

November 01, 2014

The Fed, with QEs, helped some kids to have a merry Christmas. Now we’ll have to see how all parents pay for it.

Sir, I am amazed that on November 1, 2014, you can title your editorial “Farewell to the Fed’s QE3, a monetary job well done”, all as if its entire job has been done.

Yes the Fed, with its QEs, like a Santa Claus brought some children a lot of gifts paid for by parents’ credit cards, and helped to keep up the Christmas spirit.

But now it is up the parents to pay for those gifts, and to see what to do with the kids who did not receive much or any of these… and, if all that goes well, then that would be the the time to thank the Fed/Santa Claus… not one second before!

You hold “QE was exactly the right thing to try in reviving the US economy”. And I say absolutely “No!” to that.

Before any QE could be really productive, the US (and Europe) needed to remove those credit-risk-weighted equity requirements for banks that cause so much distortion in the allocation of bank credit to the real economy. Those dumb risk adverse regulations caused the crisis and stopped the recovery.

How the improvement of public finances is achieved, must be made a part of that “moral challenge”.

Sir, Martin Wolf correctly holds that “Improving public finances is a moral challenge”, since “Morality requires a balance between meeting legitimate demands upon the state and the cost of taxation. October 31.

Absolutely, but let us never forget that, in order to make the state more accountable to its citizens, avoiding forging a separate power, the how that fiscal balance is met, is also an issue of morality, not only a question of numbers balancing.

A government which receives its revenues mostly from citizens, by means of personal income and property tax will probably feel, one way or another, to be held much more accountable for its action, than a government which receives its income mostly from corporate taxes, sales taxes, and, in some extreme cases, like that of my poor Venezuela, from revenues like oil that governments believes to be rightfully theirs.

As a former Executive Director of the World Bank, I often toy with the idea of having WB evaluating how much governments around the world are revenue-wise accountable to its citizens, but, since the shareholders of the WB are governments and not citizens, perhaps that would just be too much to ask of it. Nonetheless, someone, on behalf us citizens, should be doing just that.

That way perhaps concepts like allowing governments to pay off their debts through inflation (financial repression) would be more understood as something immoral than as something financially savvy.

PS. And of course, while on this issue of morality, and though very few are concerned with it, let me remind you that for regulators to regulate banks without distorting the access to bank credit, favoring some and discriminating against others, should be a moral challenge too.

October 30, 2014

FT, what Sweden most needs is to throw out its current bank regulatory Pharisees.


Sincerely, it reads like you are trying to convince yourself about feeling some schadenfreuden, with  weak arguments… and even sounding a bit besserwisser reminding us of the importance of looking at real more than at nominal interest rates.

And you even dare to speak of some have “been handed a clear defeat” when you must know that the real economy, the real jury, is still deliberating all around the world, without reaching any kind of clear consensus on what is to be done.

But it is when you argue: “The trade-off between safer debt levels and lost growth was not worth it” that, for the umpteenth time, I need to ask you… is the trade-off between (the illusion of) safer banks and lost growth really worth it?

Sweden is a small country blessed with immense entrepreneurial spirit, so much that even socialists regimes have been wise enough to nurture it. And, in this respect, it is one of those most hurt by that silly risk aversion that has been introduced in its banking system, by means of Basel Committees’ risk-weighted capital/equity requirements… which precisely discriminates against the fair access to bank credit of SMEs and entrepreneurs.

In Swedish churches, psalms pray for “God make us daring”, while some un-elected bureaucrats dedicate themselves to castrate and de-testosterone its banks.

And that is why Sweden also needs, urgently, a psalm that prays for its current bank regulatory Pharisees to be thrown out!

October 29, 2014

It might be time for the Financial Times, FT, to change its name to the Regulatory Times, RT.

Sir, you write that “BoE encourages insurers to be weather resistant” October 29. And it all almost reads like a sophisticated April Fools’ Day joke.

You argue: “While markets are meant to incorporate a variety of opinions, high regulatory standards are needed to stop a casual attitude to climate change becoming a competitive advantage”… and so it is “encouraging that the Bank of England is determined to be on the front foot”

“Encouraging”? After what regulators, not being able to contain their hubris, thinking themselves capable of being the risk managers for all banks, recently, with their credit risk weighted equity requirements, did to the financial system?

Should we understand this means that the Financial Times believes regulators can come up with not only better insurance standards than the market, but also that such regulatory meddling would not risk produce some extremely risky unexpected consequences?

FT who are you? Why do you not change your name, to the Regulatory Times?

Martin Wolf, it is not Europe’s banks which are too feeble to spur growth. It is their regulators who are.

Sir, I refer to Martin Wolf’s “Europe’s banks are too feeble to spur growth” October 29.

Wolf writes: “High leverage impairs the ability to finance growth. A responsibly managed yet highly leveraged institutions would seek to… hold highly rated assets. This is likely to militate against the productive investments the Eurozone needs”.

Indeed… but why is it so Mr. Wolf? Could it possibly be (as I have so mono-thematically explained to you for soon a decade) because feeble bank regulators decided, for no good reason at all, banks needed to hold more capital/equity against highly rated assets than against more “risky” productive assets?

Mr. Wolf, tell us, what responsibly managed bank should not responsibly look to obtain the largest risk adjusted returns on its equity?

Of course some bankers might have lobbied strongly for some ultra-low capital requirements, but it was the regulators who approved these… and so stop blaming the banks so much, and join me in blaming those who are most to be blamed.

Of course Europe’s banks have “too little capital”, and that is mostly because too little capital was required of them when lending to what was officially perceived as safe. But it is not the too little capital that mostly hinders banks from helping the real economy… it is the distortion produced by the credit-risk-weighted equity requirements.

If Europe does not rid itself of those feeble bank regulators, very fast, it could soon be game over for Europe.

October 28, 2014

Britain, get the busybody besserwissers out of your Bank of England… fast!

Sir, I am shocked, and utterly concerned about my very dear Britain’s future. How on earth have you allowed yourself to be trapped by such besserwisser-busybodies hands, as is reflected in Pilita Clark’s by the “Bank of England seeks answers from insurers over climate change” October 28.

Truly mindboggling. If BoE is so concerned about climate change, then why does it not suggest that capital requirements for banks should be based on our planet-earth’s-sustainability ratings, instead of silly, purposeless, credit-risk ratings, those which are already being cleared for by banks with risk premiums and size of exposures?

Quite many of our modern day bankers have, unfortunately, never known a small or medium sized enterprise.

Sir, I refer to the analysis “Bank stress tests fail to tackle deflation spectre” October 28.

In it we read Jean-Pierre Mustier, head of corporate and investment bank at Unicredit saying: “I think the issue of small and medium-sized enterprises lending is one of demand and not so much of supply”.

And I have a feeling Mr. Mustier might be one of those modern bankers who have never ever known a small or medium sized enterprise.

And if Mr. Mustier does not understand the impact on the supply of credit to small and medium-sized enterprises, the fact that banks are required to hold so much more equity when lending to these than when lending to “absolutely safe” has, that might be because Mr. Mustier as a banker has only lent to “infallible sovereigns” or members of the AAAristocracy.

FT, look at the fine print of the stress tests of European banks before drawing optimistic conclusions

Sir, you write: “In 2012 the Eurozone through a near death experience… Banks were heavily invested in the debt to governments, which in turn were meant to guarantee to solvency of the same banks”… and now you hold that “this week, [because of the stress tests] has finally provided an example of some encouraging progress”, “Better way to check the health of Europe’s banks” October 28.

What if banks came out better in these stress tests, only because they were invested even more heavily into those government debts against which they are not required to hold any capital/equity? Would that change your perception on “encouraging progress”?

PS. You now want the Asset Quality Review to be repeated annually. If you were one of the consultants making a great living on that I could understand it...  but let me ask you... have you ever thought about how much of our economies and of our well being is driven by sheer blissful ignorance?
 

All Europe’s banks would fail a test of whether they allocate bank credit efficiently.

Sir, Gavyn Davies writes “Stress tests will not themselves bring the Eurozone back to health” October 28.

He is absolutely right, because for that to occur it would all have to start with a test of how European banks are helping the Eurozone, and since the credit-risk-weighted capital requirements that caused the current deep economic malaise are still in place, banks would clearly fail that test.

Davies also correctly holds that “not all of the problems of a diverse banking system can be fixed at once”, but, unfortunately, all the banks can be made to have problems, by means of just one systemically faulty bank regulation.

And so when Davies writes “banks need to restore their risk appetite, having spent several years preferring to build their capital buffers rather than lending to risky small businesses” I must ask where has he been. Does he not know that banks, because of credit-risk-weighing are primarily building up their capital buffers, precisely by not lending to anything that requires them to have more capital?

Davies, concludes with “The best that can now be said is that a dysfunctional banking system should no longer be a fatal impediment to growth, on the optimistic assumption that the [fiscal, monetary, structural] and other measures that Mario Draghi has promised – including a sizeable monetary stimulus - come on stream.”

No way! Doubling down on a still so dysfunctional banking system would just waste away a sizable monetary stimulus- making it all so much more dangerous for Europe.

October 27, 2014

Europe, it is your bank regulators who most must be stress-tested!

Sir, I refer to all the writings in FT on October 27 about the stress tests of European banks in order to ask you:

If all banks that failed had only given loans to infallible sovereigns, then they would have classified as the safest. Do you really think that would have helped investors to have confidence in Europe?

Frankly, regulators who can come up with something like The Basel Committee’s Bank Stability Decree, have no moral right to test any bank.

Sir, even a hedge fund founder is quoted stating: “We now know that we can have a 5 per cent contraction in the eurozone economy and the banks will still have more than 8 per cent capital – that is very positive for the sector.”

What? If lucky, it might be more than 8 per cent of capital of the-risk-weighted assets… and that, as you should know by now, can be extremely faraway from meaning the same thing.

And, why after spending so many million dollars on consultants, did they not even give us the so easy calculated leverage ratio?

And talking about the consultants, we should have their names, so as to know who to hold accountable, as paid collaborators of what seems more to be a farce concocted by regulators to save face.

PS. Sir, you who have been so mum on this issue, show me anything perceived or officially stated as "risky" that caused the turmoils in the European banking sector. 

October 25, 2014

Either the Financial Times and bank regulators, or little I, is utterly mistaken. I guess time will soon tell

Sir, on October 25 you title your editorial “The risk that QE will generate inequality”… even though you must know that’s what’s most probable. Shame on you!

And you also end by categorically stating: “Quantitative easing has been a bold and innovative experiment. Its outcomes were always uncertain, and some may have been unfortunate. But central banks have been right to do what they did.”

I am not entirely disputing that, but, over the last decade, I have sent to you, and to your reporters, over 1500 letters where I have argued the following:

The pillar of current bank regulations is credit-risk-weighted capital (equity) requirements for banks; which signify more ex ante perceived risk more equity - less risk less equity; which allows banks to earn much higher risk-adjusted returns on their equity when lending to “the infallible” than when lending to “the risky”... totally distorts the allocation of bank credit to the real economy.

And that causes banks to lend too much at too low rates to “the infallible”, and too little and at too high relative interest rates to “the risky”, like to medium and small businesses, entrepreneurs and start-ups. And, so by impeding the fair access to bank credit, it blocks equal opportunities, and therefore drives inequality.

And therefore, while those capital requirements for banks remain in effect, much of the liquidity provided by QEs is wasted, because it is not allowed to flow, by means of bank credit, to where the real economy would need it the most.

Sir, I guess we have since a long time ago arrived at an impasse. Either big Financial Times and bank regulators, or little I, is utterly mistaken. I guess time will soon tell.

If I am proven wrong, I will put on a dunce cap, take a picture of me, and post it, with my most sincere apologies to you and to bank regulators, on my TeaWithFT.blogspot.com.

If instead you are proven wrong... do you have it in yourself to do something similar?

Or is it that notwithstanding your motto "Without favor and without fear", you just do not dare to think of the possibility that the bank regulators could be so fundamentally mistaken?

PS. To introduce the virus of risk aversion into the banks of a Western World which has become what it is thanks to risk-taking, is, as I see it, pure financial terrorism.

PS. That financial terrorism has blocked the creation of millions of jobs that would have benefited our young.

NOTE: I am a happy husband, father and grandfather, with no scandalous past.

I have a long and I quite successful carrier as a financial and strategic private and public sector consultant and, in 2002-2004, I was an Executive Director at the World Bank.

I have studied in Sigtuna SHL Sweden, Lund University, IESA Caracas, London Business School and London School of Economics.

Since 1997 I have published over 800 Op-Eds in some of the most important newspapers in Venezuela.

I have had many letters and articles on banking regulations published around the world. And few can claim having warned in such precise terms on impending banking disasters as I did between 1997 and  2007. 

And I stake all my professional reputation, and the loving trust my family has shown me, on the fact that current bank regulators of the Basel Committee, and of the Financial Stability Board, have been wrong. Not a pardonable 15 degrees wrong, but an unpardonable 180 degrees totally wrong.

October 24, 2014

Failures and mistakes is something that needs to be nurtured in order to have a better future.

Sir, Gillian Tett is absolutely correct when she writes: “What is still missing, in many quarters, is a mindset – most notably a recognition by bureaucrats and bankers that failure is an inevitable part of the market system, and that it sometimes pays to wipe the slate clean rather than endlessly sweep problems under the carpet”, “Jingles that sound the beginning of recovery” October 24.

That is exactly what I referred to in a letter you published in August 2006 in which I wrote about “the long-term benefits of a hard landing” and the dangers of dabbling in topics such as debt sustainability ignoring the value of pruning or even, when urgently needed, of a timely amputation.”

But, I also think it is very important that the wiping-the-slate-clean, also applies to banks. As an Executive Director of the World Bank, in 2003, I told many regulators during a Basel II preparation conference: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

But no, the Basel Committee preferred to proceed down the road of nurturing the too-big-to-fail banks.

PS. By the way, Ms. Tett might be interested that in the US, the jingle she refers to, is not allowed when it comes to educational debt.

October 23, 2014

Could some bureaucrats wanting to hold on to their reputations and jobs, really be allowed to bring Europe down?

Sir, I refer to Claire Jones’ “ECB bond-buying plan risks falling short” October 22.

In it, Lorcan Roche Kelly, economist at Agenda Research, is quoted saying: “It’s very hard to make an argument for how corporate bond purchases [by ECB] lead to growth. Large corporations are not SMEs; they’re not having much trouble raising debt.”

Indeed, it is SMEs, and others perceived as “risky”, who are denied fair access to bank credit because of the horrendously distorting credit-risk-weighted capital (equity) requirements for banks.

But that is ignored (even by FT) or even hushed-up, because Mario Draghi, as the former chairman of the Financial Stability Board, and other of his colleagues, do not want that to be recognized as a monstrous regulatory mistake.

The banks, unwittingly, and hopefully unwillingly, have been intimated into a for Europe extremely dangerous risk aversion, and of which they cannot get out of, all because their lack of sufficient bank equity make them so dependent on what for instance Mario Draghi’s ECB does.

What a sad mess! Could some bureaucrats wanting to hold on to their reputations and jobs, really be allowed to bring Europe down?

Europe, it is not bank’s balance sheets, but bank regulations, which most need a cleansing.

Sir, Huw van Steenis writes that stress tests “have the potential to accelerate the process of cleansing banks’ balance sheets to support economic recovery” "Bank stress tests need to be a catalyst for policy shifts in Europe” October 22.

Van Steenis also holds: We also need to address blockages to the flow of funding to companies… modestly recalibrating overlapping rules if they are holding back good lending”.

Forget about “modestly recalibrating” rules, that won’t cut it.

Unless that dangerously distorting risk aversion present in credit-risk-capital (equity) requirements for banks is not completely uprooted, Europe stands no chance of a sturdy economy… worse, it will only stall and fall.

Absolutely nothing is gained by cleaning up the balance sheets of banks, if these are still given the incentives to go to where, credit-wise, it is perceived to be “absolutely safe”, and to stay away from what is deemed “risky”… like lending to SMEs and entreprenuers.

October 22, 2014

Europe must allow its SMEs to compete on equal footing with its “infallible sovereigns” for bank credit

Sir, I refer to Martin Wolf’s “Reform alone is no solution for the Eurozone” October 22.

He concludes it with: “The eurozone needs to reach a bargain between more reform and extra demand. In doing so, it must recognise that persistent stagnation is a big threat to stability. The eurozone should risk expansion. That is now the safer course.”

But, again, he does not refer to the absolute necessity of Europe getting rid of the risk aversion present in the credit-risk weighted capital (equity) requirements for banks, those which can only guarantee the mediocrity and the stagnation of Europe’s economy.

Why on earth does Wolf not do that? One reason might be that doing so, could put in evidence how the current low interests for Germany and other “infallible sovereigns” are much the result of the fact they are zero risk weighted, and that banks therefore need to hold any specific capital against exposures to them… And so getting rid of what is in effect a regulatory subsidy of government borrowings, would of course dent Wolf’s campaign for Germany to take advantage of “extraordinarily favorable interest rates” in order to “borrow to finance additional public investment”.

This madness needs to be stopped. If Europe is to stand a chance, it must allow its “risky” constituency, like all the medium and small businesses, entrepreneurs and start-ups, to be able to compete on equal footings with the “infallible sovereign” for access to bank credit.

Even without odious regulatory discrimination, life is hard enough for those tough “risky” risk takers we need to get going when the going gets tough. Without them, even the strongest sovereign would end up being nothing.

October 20, 2014

Europe, it doesn’t matter whether you’re Eurozone or not, EU or individual countries… risk aversion will take you down

Sir, Wolfgang Münchau writes: “Eurozone policy makers face three choices. First, they can transform the eurozone into a political union… Second, they can accept secular stagnation. The final choice is a break-up of the eurozone. As the political union is firmly off the table, this leaves us with a choice between depression and failure–or both in succession”, “Eurozone stagnation is a greater threat than debt”, October 20.

How depressing. But, whether to survive as the Eurozone, or as individual countries, one thing is sure. Europe, or at least some of its nations, must get rid of that risk-aversion which has infiltrated them by means of the credit-risk-weighted capital (equity) requirements for banks. Those are keeping Europe’s banks from financing the future, having them only refinancing a day by day less sturdy past.

I am writing the script for an exhibition at a European history museum… in order to try to change the course of history. It is loosely titled: “When Europe had enough, did not want to chance it more, called it quits, and began to stall and fall”. If the exhibition comes to fruition, articles like this, and many others of FT, will be part of it.

October 19, 2014

Should not Basel II bank regulations have been piloted before applied globally?

Sir, I refer to Tim Harford’s “Why pilot schemes help ideas take flight” October 19.

Let us not forget though that the most important role of pilot schemes is to help us from allowing crazy ideas that might take us down from flying.

For instance, can you imagine what sufferings the world would have saved itself from had the Basel Committee for Banking Supervision done a pilot on Basel II? Then it would have seen only a couple of banks, and not the whole banking system, exposing themselves dangerously much to what is perceived as “absolutely safe”, and dangerously little to what is perceived as “risky”? Then they would have understood, earlier, how stupid this whole idea was.

October 18, 2014

Fed’s Janet Yellen, as a leading equal opportunity killer, has no moral right to speak about inequality.

Sir, I refer to Robin Harding’s “Yellen risks backlash after remarks on inequality”, October 18.

There we read of “the high value Americans have traditionally placed on equality of opportunity”… that “Ms Yellen’s speech was about equality of opportunity”… about “the rise in inequality using recent Fed research and then laid out four “building blocks” for economic opportunity in the US: [among these] business ownership” … and that “owning a business [was an] important routes to economic mobility.

For over a decade I have argued that forcing those who are perceived as “risky”, and who therefore already have to pay higher interests and have lesser access to bank credit, to have to pay even higher interests and get even less access to bank credit, only because regulators think banks need to hold more capital when lending to them than when lending to the “absolutely safe”, is an odious discrimination and a great driver of inequality… a real killer of the equal opportunities the poor deserve in order to progress.

And of course, let us not even think of what the Fed’s QE’s have done in terms of un-leveling the playing fields. The fact is that had it not been for how the financial crisis management favored foremost those who had the most, Thomas Piketty’s "Capital in the Twenty-First Century”, would have remained a manuscript.

Sir, to hear someone who so favors regulatory risk-aversion, daring to speak about American values, in the “home of the brave”, in the land built up on the risk-taking of their daring immigrants… is just sad.

PS. To me it is amazing how bank regulators in America can so blitehly ignore the Equal Credit Opportunity Act (Regulation B)