Friday, September 23, 2016

Curses and blessings quite often come hand in hand

I will keep here my reflections on the subject in Kenneth Rogoff’s book “The Curse of Cash”. (For full disclosure I have yet not found the time to read it in its entirety)

In my comments I will often also refer to Professor Rogoff’s blog.

Kenneth Rogoff writes: “But for all the advantages of cash, we have to recognize that the current system is badly off kilter. A lot of central banks and finance ministries know it, as do justice departments and tax authorities.”

I fully agree, 100%, but do “We the People know it? There are reasonable and unreasonable doubts out there. And I am not 100% sure among which of those mine could best qualify.

Should not abolishing larger anonymous practical ways of storing wealth have to be subject to something like a referendum? I have no idea?

Yes cash might cause some local tax evasion, but does anyone really believe that big tax evaders keep their fortunes in cash like some seem to say? I just know that the word “cash” is open to all types of confusions (that are sometimes exploited)

Cash in hand, if devalued, looses its value equally for all. Non-cash can be devalued discriminatorily. Do we want our grandchildren to be subject to such great Big Brother power? As a Venezuelan, not me for sure!

Cash, as can oil, can indeed be a curse. But does that mean that we in Venezuela should stop extracting oil? I don’t think so.

And how would the elimination of for instance $100 bills, that might represent about one trillion dollars take place? I have no clue.

Would it not just dramatically increase the value of other assets? Not much, it seems like peanuts when compared to what is done with Quantitative Easing.

Do I want cash to assist drug trafficking? Of course not, don’t be silly.

Rogoff writes: “but most world holdings of dollars are in the underground economy (crime and tax evasion). I am not sure. First of all because I do not agree that all underground economy must be either illegal or bad. Then because I think criminals have many alternatives of how moving cash into something else. Moreover, much cash might make even many hardened criminals nervous.

Thursday, September 22, 2016

Low interest rates, by inspiring laziness, sometimes also act as a determent to economic activity

I just want to add a factor that I feel has been ignored in all the ongoing debate on how low or even negative interest rates can stimulate economic activity.

During my life as a financial and strategic consultant, I have often seen how the pressure of the interest-costs-clock on projects, have really inspired these to get going, to execute fast. In other words, low interest rates can also inspire laziness.

What a great deal! Take loan at negative interest rates... do nothing... stay in bed... repay... and profit!

Wednesday, August 31, 2016

My number umpteenth effort to explain to XXX the very bad of current bank regulations.

A “risky asset” yields more, let us say 15%.
A “safe asset” yields less, let us say 5%.

And those yields would be deemed by the market as equal risk adjusted yields.

And market participants would buy those assets according to their needs and risk appetites.

But then came the Basel Committee for Banking Supervision with its risk weighted capital requirements for banks, more risk more equity – less risk less equity, and that completely distorted the allocation of bank credit.

Because now banks could leverage their equity more with safe assets and thereby obtain higher risk adjusted returns on safe assets than with risky assets.

As a result the overall market demand for safe assets increased, and that of risky assets decreased. That “risky asset” yielding 15% before, might now have to yield 16% or more. That “safe asset” yielding 5% before, might now just yield 4% or less.

Is this good? Of course not! Regulators, probably without even understanding what they were doing, altered the free market’s risk assessments; causing dangerous overpopulation of safe havens; and, for the real economy, equally dangerous under-exploration of the risky bays where SMEs and entrepreneurs usually reside. 

The net result of it is:

Crises, like that of 2007-08, resulting from excessive exposures to what was perceived, decreed or concocted as safe, like AAA rated securities and loans to sovereigns (Greece)

Stagnation, resulting from all the stimulus, like that of QEs, not flowing freely to where they are most needed, but only populating more and more the remaining safe havens.

In other words this damn piece of regulation has our banks no longer financing the riskier future but only refinancing the safer past; and so we are doomed to doom and gloom, and to run out of safe havens.

Of course, having set the risk weight for loans to sovereigns at 0% and to We the People, the regulators also introduced, through the backdoor in 1988, a powerful pro-statism tool.

The distortions are not even acknowledged by the regulators, much less discussed.

God help needing pensioners and job seeking youth! God help us all!

PS. If you have understood this and want more details on the greatest regulatory faux pas in history you might want to read the following more extensive aide memoire.

PS. Here are some of my past explanations for dummies.

PS. Today 50% of my constituency, my grandchildren, gets to be 5 years old.

Wednesday, August 24, 2016

Was it an accident or is it a statist setup?

In 1988, suddenly, without asking anybody, least us citizens, bank regulators, for the purpose of setting the capital requirements for banks, decreed the risk weight of the sovereign, the government, to be Zero Percent, while the risk weight for We the People was set at 100%.

Not having to hold capital against sovereign debt permits banks to lend to government at lower rates; which translates into a regulatory subsidy of government debt.

Then in response to the 2007-08 crisis, itself a result from distorting bank regulations, central banks launched quantitative easing, which basically meant injecting liquidity into the economy by purchasing government debt; and for example the Fed has ended up with about of US$ 4.5 trillion in government paper.

Much of the liquidity injected went to prop up real estate, bonds and shares, but a lot of it spilled over into more demand for government paper.

Naturally, interest rates for public debt fell, and many, like pension funds, in order to adjust for their liabilities, had to purchase even more public debt.

And while regulatory subsidies of public debt are kept in place, this vicious circle will continue.

And to top it up, too many “experts” now advance the argument that government should take advantage of these low interest rates, to launch infrastructure projects.

Let me be very clear about it, the fact that government might (artificially) even be paying a negative rate on its borrowings, does not mean it should borrow, because it is still very capable of investing those funds in projects yielding even more (real) negative rates.

I do not know how we got to this point, whether by accident or whether a set up by runaway statists. You tell me!

PS. When utilities were being privatized in South America, I often heard accusations in terms of “savage neo-liberalism”. Since these utilities were not adjudicated to whoever offered to serve us citizens the best and the cheapest, but to whoever offered to pay the government the most, a tax advance that left us with a huge bill to pay at private investment rates of return, to me those privatizations were much more an expression of sadist statism.

The solutions I offer are ignored. Might it be because these provide too little business to expertize and redistribution profiteers?

Before the 2007-08 crisis there was some economic growth resulting from a big expansion of credit, which was fed by some very low capital requirements to banks and that allowed these to, in some cases, leverage their equity over 50 to 1.

Then disaster struck, as a consequence of excessive exposures to what had very little capital requirements, like loans to sovereigns (Greece), investments in AAA rated securities and the financing of houses. 

In panic, floods of money, for instance by means of QEs, were poured over the economies, with little results to show for it, and now, the most important world economies, are stuck. Any additional stimuli, be it by means of public borrowing for infrastructure projects, QEs or low or negative interest rates will only complicate matters much more... like for pension plans.

The truth is that trying to get strong and sustainable economic growth, while keeping in place credit risk-adverse capital requirements for banks that exclude SMEs and entrepreneurs from fair access to bank credit, is just impossible.

What to do?

1. Very carefully remove the risk-weighted capital requirements for banks that distort the allocation of bank credit to the real economy. In order to make sure banks have sufficient capital while adapting, and that credit is not constrained, central banks could offer to purchase some of their bad portfolios, with the understanding that no dividends would be paid until these portfolios had been repurchased by the banks. (See what Chile did)

2. Create new demand (and lessen inequalities), by means of 100% tax-funded Universal Basic Income schemes. One of these could, if funded with carbon taxes, also help with environmental sustainability.

I have been arguing against the risk weighted capital requirements for banks for soon two decades, and I have explained many of its mistakes over and over again. I have yet not been able to obtain one single answer from those responsible, like from the Basel Committee or the Financial Stability Board. Could it be because they have no answers? 

Or could it be that my counter proposals are too straightforward, to simple, and would therefore erode the earnings potential of bank regulators (and consultants), of climate change and inequality fighters, and of the general expertize and redistribution profiteers?

Or is it that I just don’t know what I am talking about? It could be, though I think I can prove I do know by means of somecertifiable early opinions on these issues.

Sunday, August 21, 2016

With interest rates and bank credit officially manipulated, what market-fundamentalism does statism's nobelist Stiglitz refer to?

We have many central banks purchasing public debt in outrageous amounts, and thereby manipulating and distorting all interest rates yield curves in favor of their governments.

And the regulators, with their risk-weighted capital requirements, allow banks to leverage much differently their equity, depending on the ex ante perceived or decreed risk; something which distorts entirely the allocation of bank credit to the real economy.

And since the risk weight of the Sovereign has been decreed 0%, while that of We the People has been set at 100%, most of that regulatory manipulation is in favor of the government.

And then time after time we hear experts, like Nobel Prize winner Professor Joseph Stiglitz, attributing most of our current problems to neo-liberalism and market fundamentalism; and often suggesting that the solution lies in increased government spending. What free markets are they referring to? In Stiglitz case, could it be he is only a statist nobelist creatively adapting the facts to his storyline?

PS. I have not read Stiglitz’ “The Euro” yet but, from what I hear he does not link Euro’s troubles in any way to loony bank regulations.  The Euro did indeed present challenges but, when in Venezuela I wrote my “Burning the bridges in Europe”, I had no idea it would also have to face such statist and distorting regulations.

PS. When utilities were being privatized in South America, I often heard accusations in terms of savage neo-liberalism. Since these utilities were not adjudicated to whoever offered to serve us citizens the best and the cheapest, but to whoever offered to pay the government the most, a tax advance that left us with a huge bill to pay at private investment rates of return, to me those privatizations were more an expression sadist statism.

Tuesday, August 16, 2016

Friends, if you ever get a chance to talk with a bank regulator ask him this, and then you’ll know they don’t know

Sir, by using risk weighted capital requirements you allow banks to leverage assets differently, something which influences differently the banks' risk-adjusted returns on equity. Don’t you think this could dangerously distort the so vital efficient allocation of bank credit to the real economy?

Sir, we see you have set a risk weight of only 20% for private assets rated AAA to AA; and one of 150% for those rated below BB-. Do you really believe that what is rated below BB- is more dangerous for the bank system than what is rated AAA to AA?

And when you then see him evading the issue by answering something else, then you have the right to know, as I do, that he and his colleagues have no idea about what they are doing… and are running scared people will find out.

PS. If you want further details on the bank regulatory monstrosity you can go HERE

Friday, July 01, 2016

The Basel Committee for Banking Supervision successfully staged a cloaked global statist coup

Supposedly to make our banks safer, in 1988, with the Basel Accord, Basel I, the Basel Committee for the purpose of setting the capital requirements for banks, declared the risk weight of the “safe” sovereign to be zero percent, and that of “risky” not-rated citizens, We the People, to be 100 percent.

That meant banks needed to hold much less or no capital at all, when lending to the sovereign than when lending to citizens; which meant banks could leverage their equity and the support they received from society (taxpayers) much more when lending to the sovereign than when lending to citizens; which meant banks would earn higher risk adjusted returns on equity when lending to sovereigns than when lending to citizens; and which meant banks would favor more and more lending to the sovereign over lending to the citizen. And the SMEs and the entrepreneurs basically here represent the “not-rated citizens”.

There could be some discussion on whether lending to sovereigns represent less risk than lending to SMEs and entrepreneurs. I do not believe so. Banks do not create dangerous not diversified excessive exposures to SMEs and entrepreneurs; and, at the end of the day, the sovereign derives all its strength from its citizens. 

But what cannot be discussed is that implicit in these regulations, is the belief that government bureaucrats use bank credit more efficiently than SMEs and entrepreneurs, and that is pure and unabridged dumb runaway statist ideology to me.

For a starter, without this kind of regulatory subsidy, the Greek sovereign would not have been able to obtain so much credit. 

And then, without this kind of regulatory tax on private initiative, Greece will never be able to work itself out of its current predicament.

And the world keeps mum on this!

Saturday, June 04, 2016

“I honestly don't understand why people vote against Universal Basic Income UBI”. Here are some reasons.

The most general reason, thanks to arguments spread around by interested redistribution profiteers, is that by means of a UBI many will receive more than they should… in terms of what they need… and without reflecting enough on what is being redistributed, a societal dividend, really signifies.

The second reason is that many might consider that for some, given their special needs, a UBI does not suffice to keep them out of unfair unacceptable hardships… and without reflecting that not only nothing with UBI states a “that’s all folks!”… and again without reflecting enough on what is being redistributed, a societal dividend, really signifies.

Three, most those who carry out research on the consequences of UBI are, one way or another, often the recipients of re-distributional favors, and therefore have a bias against UBI.

For, bad proposals, look at the Swiss referendum. “2500 Swiss Francs or $3500 — would be paid to every citizen, for their whole life, no matter where they live. Those with a job could still work but would have the monthly income deducted from their salary.” 

Sincerely in such as referendum, I would also vote NO!  At about 50 percent of the GDP per capita, it is way too much. In Switzerland a number like $1.000, and expressed as a percentage of GDP or a percentage of average salaries, would be a much more reasonable level at which to start this social experiment.

And of course the idea of those working not getting the UBI plays directly into the hands of those arguing that UBI could cause people to work less.

So what is a Societal Dividend? Here is my take on it.

It is an amount transferred to anyone independent of having been able to capitalize on society’s strengths, like having been able to get a job.

It could be seen as an effort to grease the real economy by combating the natural concentrations of wealth.

It could be seen as a substitute for all those redistribution efforts that because of their complexity is bound to attract the profiteers.

It is a well-funded transfer, no funny money, from citizens to citizens, not depending on government favors. It could therefore be seen as an effort by citizens to become more independent of that populism and demagoguery that often lies behind all societal redistribution.

The way it is funded, could help to align the incentives for other societal causes, for instance if with carbon taxes, with the efforts for a better environment.

Wednesday, May 04, 2016

Candidates to president or prime ministers, for our own good, should have spent years in solitary confinement.

We should require everyone aspiring to be president or prime minister, to have spent 10 years or more in solitary confinement, getting his own life priorities sorted out, before he has earned the right to rearrange ours. 

Thursday, April 28, 2016

Here are 23 reasons for why I believe the bank regulators in the Basel Committee are complete idiots… or something worse.

A brief comment. Do you think it is disrespectful of me to call the Basel Committee's regulators “idiots”? If you had tried for more than a decade to get some answers in all politely thinkable ways, and you have only been met by silence… and if you were as convinced as me that their regulations are utterly disrespectful of the future world of my children and grandchildren… then you might call them something much worse.

In 1999 in an Op-Ed I wrote: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of the banks”. But little did I suspect the regulators in the Basel Committee would be so incredibly inept!

So here are the reasons... for now 23... but still counting!

Undefined purpose: The regulators never defined the purpose of our banks before regulating these. That’s why they only cared about banks’ safety, as mattresses into which stuck away cash, and cared not one iota about the vital social purpose of banks of allocating credit efficiently to the real economy. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

Boundless hubris: To think that, from their desks, they could be the risk managers for the whole banking world, and with some standard risk-weights, make the banks allocate credit better and safer to the real economy, is pure mind-boggling hubris.

Confusion about relevant risks: The regulators looked at the risks of the clients of the banks, while they should have looked at the risks of the clients of the bank for the banks. They never studied empirically what has caused bank crises. That is why for instance in Basel II of 2004 they assigned a risk weight of 150 percent to clients rated below BB-, those clients that banks would never ever build up dangerous exposures to, and of only a 20 percent to those rated AAA to AA. In essence like a nanny telling kids to stay away from the ugly and foul smelling, and embrace more those nice looking gentlemen who offer them candy.

Total confusion with the ex-ante and the ex-post: What is the ex post credit risk conditioned on what has been ex ante perceived? Hint - motorcycles are correctly viewed as much riskier than cars… and therefore much more people die in car accidents than in motorcycle accidents.

Using the expected as a proxy for the unexpected: Capital requirements are there to cover for un-expected events. Credit risk is part of the expected and so using this as a proxy for the unexpected is senseless. In fact, the safer something is perceived, the bigger its potential for delivering the unexpected.

Excessive consideration of credit risk: Frankly of all risks out there these regulators had to pick “credit risk”? The risk most already cleared for by banks on the asset side, by means of risk premiums and size of exposures, is credit risk. To clear for that same credit risk in the capital signifies giving too much consideration to credit risk. And let us never forget that any risk, even if perfectly perceived, leads to the wrong actions if excessively considered.

Overreliance on data and models: In October 2004 in a formal statement at the World Bank I warned: “Much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.

Ignoring how vital true risk taking is: Risk taking is the oxygen of any development. For banks to take risks, albeit in small amounts, on “The Risky”, like with SMEs and entrepreneurs, is absolutely vital for the economy to move forward, in order not to stall and fall. Instead regulators gave banks incentives for building up excessive exposures to “The Safe”, a quite useless and very dangerous kind of risk-taking.

When stress testing banks, they reveal ignorance: A banks’ balance sheets need to be tested not only for what is on these, but also for what is lacking. Have they done that? Of course not; again they never defined the purpose of banks.

No understanding of distortion on the margin. When now, playing tough, real macho-men, regulators increase capital requirements, they evidence they have no understanding of how their distortions distort on the margin. The scarcer a bank finds its regulatory capital to be, the more it has to stay away from what requires high capital requirements, namely “The Risky”

Runaway statism: In 1988 with Basel I they assigned a risk weight of zero percent to their friendly sovereigns, and of 100 percent to the citizens. That in effect meant that they believed government bureaucrats to be able to use bank credit more efficiently than the citizens. That in effect ignored that the strength of a sovereign is mostly defined by the strength of its citizens.

No financial acumen: They never understood that with risk weighted capital requirements, the banks would be able to leverage differently different assets, and that would produce different risk-adjusted returns on equity for different assets, than would have been the case in the absence of the risk-weighting. The result was of course favoring more than usual those perceived decreed or concocted as safe, and disfavoring more than usual the access of bank credit of those perceived as risky.

Misalignment of the evaluation bias: Bank used to have a bias to increase the perception of risk, so as to charge higher risk premiums; and borrowers to reduce the risk perception o as to reduce the risk premiums. That conflict was useful for all. Now suddenly bankers also want to reduce the perception of risk, so as to reduce the capital requirement. And that aligns dangerously both parties on the same side, against the regulators.

No understanding of systemic risks: In January 2003 I wrote in Financial Times: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds. Friends, as it is, the world is tough enough.” What more can I say?

No understanding of fragility: In April 2003, as an Executive Director of the World Bank I stated: “A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.” What more can I say?

No understanding of pro-cyclicality: When times are good, credit-risks seem low, so the risk-weighted capital requirements allow banks to expand more than they should; and when times are bad, the credit risk are naturally perceived higher, and so the capital requirements force banks to contract credit, precisely when less bank credit austerity is needed. What more can I say?

No understanding of TBTF banks growth hormones. Nothing like the micro capital requirements, against assets of large international banks with a lot of specialized activities, has served as the growth hormones for the Too Big Too Fail banks.  

Macro-imprudence: Prudential regulation helps failed banks to fail expediently. Macro-imprudent regulation impedes failed banks from failing… which builds up huge mountains of combustible materials waiting for a Big Bang.

Disdain for equality of opportunities: John Kenneth Galbraith wrote in “Money: Whence it came where it went” “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is” And so, with their discrimination against “The Risky”, you could say the regulators decreed inequality.

Financialization of the economy: By allowing ridiculously low capital requirements for assets perceived as safe, the regulators allowed banks to leverage 60 times to 1 and more their equity, and the support they received from society (taxpayers). That facilitated the current generation to extract more borrowing capacity to sustain their own consumption than any other previous generation, like with reverse mortgages. That left little borrowing capacity over for the future generations.

No capacity or will to rectify: Here we are soon a decade after the 2007-08 crisis and the regulators have yet not been able to connect the dots between what caused it; real estate, AAA rated securities and sovereigns like Greece, all with very low risk weights and therefore very low capital requirements for these assets.

And they only dig us deeper in the hole: Basel I has only 30 pages, Basel II grew into 347 pages and Basel III is growing into a more than a thousand pages monster. It seems they want to solve the shortage of jobs by creating bank regulation consultancy jobs. Every day that goes our banks finance less and less of the riskier future only to refinance more and mote the, for the time being, safer past.

And you wont believe this: The standard risk weighted capital requirements for banks were decided on using a portfolio invariant model “so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.” And the explanation for this horrible simplification was because that to do it portfolio variant, “would have been a too complex task for most banks and supervisor”. What more can I say... but they did not find it too complex to distort it all?

A Spanish proverb: "From safe tranquil waters free me God, from dangerous turbulent ones, I’ll free myself"

Or Voltaire’s “May God defend me from my friends: I can defend myself from my enemies.

PS. Why do I mention the possibility of “something worse”? Because for me it would be hard to think of a more efficient and devious way to destroy capitalism, and the Western Society, than infusing it with an extraordinary silly risk aversion. The AAA-bomb

PS. I am sure there must be a lot of other good examples and explanations of the Basel Committee's idiocy that I have expressed here and here.

PS. Deregulation? Hah! Had banks not been regulated at all, the Crash 2007-08 would never have happened. Markets would knowingly never allowed banks to leverage their equity 30-50 times to 1, no matter how secure their assets seemed… as did happen. The regulators, with their “risk-weighing of assets” confounded the markets into thinking that, one way or another all risks had been taken cared of. They even confounded their own. Too often we read “experts” like Alan Greenspan discussing the evolution of bank capital, comparing capital to asset ratios with capital to risk-weighted assets ratios… something as oranges-and-apples as can be.

PS. It seems like we need robots in the Basel Committee for Banking Supervision in order to free us from weak egos incapable of admitting mistakes.

PS. And what to say about those who keep the failed Basel Committee regulators regulating?  Perhaps another John Kenneth Galbraith quote applies: If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.