Should we pack like sardines to develop better?

Although undoubtedly it contains some very interesting arguments I feel quite uncomfortable with the message being sent out in the World Development Report 2009 of the World Bank titled "Reshaping Economic Geography".

Somehow the reports seems to argue that we need to pack like sardines in order to develop; and somehow I get the inkling that much of the growth we perceive taking place in the high density areas has to do with the scarcity of space in high density areas. If I am packed as a sardine and therefore have to pay a higher rent for my place am I therefore richer than the one who has to pay much less for his much more generous elbow room available? We do not include home values in growth figures based on square feet but in money terms.

For instance in the US they give more government sponsored financing to houses that lie in higher value areas; which by itself helps to make them higher value areas. Now, is this muscular growth or obesity?

And then it is also the timing of the report… just when communication technologies make it possible to be distantly close here comes a report telling us basically that physical closeness is what most matters.

Sincerely I am not sure this report is sending out the right development message and I sure hope I am wrong about my misgivings.

Here you can view one presentation of the report http://www.blip.tv/file/2498676

The GPS and the AAAs

Not so long ago I asked my daughter to key in an address in the GPS and then even while I continuously heard a little voice inside me telling me I was heading in the wrong direction I ended up where I did not want to go.

Something similar caused the current financial crisis. First the financial regulators in Basel decided that the only thing they would care about was the risk of individual financial defaults and not one iota about any other risks; then though they must have known these were humanly fallible they still empowered some few credit rating agencies to be their GPS on default risks; and finally, by means of the minimum capital requirements for banks, they set up all the incentives possible to force them to heed what the GPS said and to ignore any internal warning voices.

Of course, almost like if planned on purpose, it all ended up in a crisis. In just a couple of years, over two trillion dollars followed some AAA signs over the precipice of badly awarded mortgages to the subprime sector. Today, we are still using the same financial risk GPS with the same keyed in instructions... and not a word about it in the recent Financial Regulatory Reform proposal

I hate the GPS type guidance of any system since I am convinced that any kid brought up with it will have no clue of what north, south, east or west means; just as the bankers not knowing his client's business or how to look into his client's eyes or how to feel the firmness of his client's handshake, can only end up stupidly following someone else's opinion about his client on a stupid monitor.

I hate the GPS type guidance system because, on the margin, it is making our society more stupid as exemplified by how the society, day by day, seems to be giving more importance to some opaque credit scores than to the school grades of their children. I wait in horror for some DNA health rating scores to appear and cause a total breakdown of civilization as we know it.

Yes we are buried under massive loads of information and these systems are a tempting way of trying to make some sense out of it all, but, if we used them, at least we owe ourselves to concentrate all our efforts in developing our capacity to question and to respond adequately when our instincts tell us we're heading in the wrong way.

Not all is lost though. I often order the GPS in my car to instruct me in different tongues so as to learn new languages, it gives a totally new meaning to lost in translation, and I eagerly await a GPS system that can describe the surroundings in more extensive terms than right or left, AAA or BBB-, since that way not only would I get more out of it but, more importantly, I would also be more inclined to talk-back.

The OAS botched it!

The OAS botched and is making much more serious the already Honduras case. Should they be sued for irresponsible behavior?

Amazingly, knowing that there was an open confrontation between the Executive Power, the Congress and the Supreme Justice in Honduras, the OAS sided with Zelaya without even giving the other powers a fair hearing.

In order to understand why this re-election issue is almost an existential issue in Honduras let me point to article 42 in their Constitution that though a bit crazy nonetheless clearly states that you will “lose your conditions as a citizen if inciting, promoting or supporting continuance or the re-election of the President.”

Honduras Constitution Art 42 you “lose your conditions as a citizen if inciting, promoting or supporting the re-election of the President.”

In a democracy is a congressman less elected than a president?

In a democracy is the Supreme Court less is than a president?

It is truly sad to see international organizations circling two school boys shouting for two of them to fight till death, and enjoying it

After Zelaya, how many consecutive elections must be held in Honduras before a new Government is legitimate?

How come?

How come a nation of free citizens have accepted to chain themselves to some opaque credit scores to such an extent that one sometimes can hear parents worrying more about their children’s credit scores than their school grades?

At the UN 192 countries got it wrong

192 countries got together for the United Nations Conference on the World Financial and Economic Crisis and its Impact on Development and, in their final communiqué, among the causes of the crisis they say “major failures in financial regulation, supervision, and monitoring of the financial sector, and inadequate surveillance and early warning… compounded by over-reliance on market self-regulation, overall lack of transparency, financial integrity and irresponsible behavior, have led to excessive risk-taking, unsustainably high asset prices, irresponsible leveraging, and high levels of consumption fuelled by easy credit and inflated asset prices.”

How can 192 countries get it so wrong? Yes it is true that assets reached unsustainably high prices and yes it is true there were high levels of consumption fuelled by easy credit and inflated asset prices but it is absolutely false that there was excessive risk-taking or autonomously created irresponsible leverage.

The markets, over just a couple of years channeled two trillions of dollars (perhaps more than what has been lent by the Word Bank and the IMF ever since their creation) to finance houses in the US through securities rated AAA and this would much better classify more as misguided excessive risk-aversion.

And the high real leverage of the banks was foremost a direct the consequences of the regulatory innovation of the minimum capital requirements for the banks based on risks that emanated from the Basel Committee. For instance the regulations authorized an outrageous 62.5 to 1 leverage for when banks lent to corporations rated AAA to AA-.

Nor did the conference say a word about how these minimum capital requirements by which the regulators arbitrarily intervened in the market mechanism of allocating risks, created a de-facto subsidy for what can dress itself up as low risk and a de-facto tax on whatever contains more risk, such as the risks normally present in development.

Give the global migrant workers community an undiluted voice

Those migrants that when they leave there homeland are so easily forgotten, except when they forget to send a check home; and that upon their arrival are not sufficiently recognized by their new host conform a particular group of human beings with a particular set of interest and needs. Nowadays the economic significance of this migrant working community can be estimated to be somewhere between that of China and India but yet, just because they have no land, they have not been given a formal voice in the global and multilateral institutions.

This needs to be corrected and as a minimum the global working migrant community should have a chair at the World Bank and the United Nations.

It was our experts that failed us… and they still do.

That the markets did not work because there were intromissions in its workings, is not the same as a market failure, and that is a distinction that we must make so when we now find ourselves lost so that we do not lose us even more. We owe that foremost to the developing countries.

The Basel Committee the most important regulatory authorities of the by means of allowing for immensely smaller bank capital requirements, favored immensely anything that could display a triple-A sign issued by the credit rating agencies. And sure enough… the market responded as human markets normally respond by creating a huge number of AAA signs, many of them related to securities backed by lousily awarded subprime mortgages and which the investors, like a herd, followed over a precipice.

Unfortunately because most of the experts failed to realize it, or if they did they did not speak out against it, almost all notorious economic and financial experts are mostly ignoring the above in a global cover-up. More than a market failure what we had were the experts failing us.

Let me just give one example of what I mean. “The Commission of Experts on Reforms of the International Monetary System” of the President of the General Assembly of the United Nations, chaired by Professor Joseph Stiglitz and comprised of outstanding economist, policy makers, and practitioners from all over the world chosen, and I quote the Note by the President of the General Assembly, “based on their comprehensive understanding of the complex and interrelated issues raised by the workings of the financial system”, they write the following in paragraph 41 of their report dated March 19 2009.

1. “The collapse in confidence in the financial sector is widely recognized as central in the economic crisis; restoration of confidence will be central in the recovery. But it will be hard to restore confidence without changing the incentives and constraints facing the financial crisis”

Of course restoration of confidence is central for economic recovery but for the recovery of confidence a full understanding of what happened is a must. That a Bernard Madoff can cheat does not affect confidence in the markets because the markets are much aware that cheaters have always been around and are in fact themselves a part of the market.

But, if the credit rating agencies who were so recently officially bestowed with so much power in the surveillance of risks, and therefore must be the best, sort of the “Appointed Surveyors to the Majesty” managed to fail so miserably, then that is of course a tremendous blow to confidence. That loss of confidence can only be cured by fully acknowledging that the mistake was in the creation of an oligopoly in risk surveyance .and that this oligopoly will now be eliminated… not strengthened.


2. “It is imperative that the regulatory reforms be real and substantive, and go beyond the financial sector to address underlying problems in corporate governance and competition policy, and in tax structures, giving preferential treatment to capital gains, that may provide incentives for excessive leverage.

The above says that not taxing the profits is at fault and so that presumably we now must tax profits? Silly, the problem is not that the profits had tax incentives but that the profits proved to not be profits at all. The “incentives for excessive leverage” those were provided by the regulators and thank God… the authorized financial leverage was never even reached by any bank before the crisis. This of course does not preclude that there might be other valid reasons to tax profits but that is a quite different matter.

3. “Even if there had been full disclosure of derivative positions, their complexity was so great as to make an evaluation of the balance sheet position of the financial institutions extraordinarily difficult”.

First the crisis was not caused by “derivative positions” and second, the “complexity” argument is irrelevant because the instruments that were so complex that they were not even understood by those who generated them, would never even have reached the balance sheet of a bank, or an investor, had they not been granted the triple-A rating which substituted for the understanding, unfortunately in a much imperfect way. There is of course a need for a better management of the exposures though central clearing houses but that is a quite different matter.

Does this all mean that I do not believe that Stiglitz and his fellow experts cannot help us? Of course not and I do agree with many of the recommendations in the report. But, in order for these and other experts to really be of help they better step down from where they think they belong and start to discuss as the faulty humans we all are.

The commission says “As the world focuses on the exigencies of the moment the long standing commitments to the achievements of the Millennium Development Goals and protecting the world against the threat of climate change must remain the overarching priorities; indeed, appropriately designed global reform should provide an opportunity to accelerate progress toward meeting these goals.”

I could not agree more… but that has to start with a debate that is much more profound than a Lilliput-Blefuscu or a short-long skirt-length type of debate and to which the commission seems to be headed, when it allows itself to (somewhat gloatingly) say that “the current crisis has exposed deficiencies in the policies of some national authorities and international institutions based on previously fashionable doctrines.”

Sincerely,

A member from the civil society who having seen trillions going down the drain of badly awarded mortgages instead of perhaps helping to avert or to adapt to climate change, does not really feel like being too civil for the time being.

Odious Debt

One of my recent articles, which focused on the need to protect the environment, concluded by recalling the ancient proverb, “We have not inherited the world from our parents; we have borrowed it from our children.” On that occasion, as always, I thought about Venezuela and I knew that, as borrowers from our children, we have acted like veritable pigs. Not only have we extracted our country’s oil without putting it to much good use, we’ve even mortgaged its future in the process.

Some countries may be in need of foreign loans to get on their feet, but here in Venezuela we ought to know by now that our foreign public debt, be it the debt of yesterday, today, or tomorrow, only serves to fasten us all the more securely to a sinking ship. Foreign public debt is a monstrous obstacle. It keeps our citizens from getting loans (or at least makes loans much more expensive) that could indeed lead to growth in the country and allow the government to satisfy social needs through taxation.

Our only salvation is to learn how to resist the lure of the eternal sirens’ song, which goes “foreign debt taken on by the previous administrations is evil and good for nothing, but rest assured, with us, everything’s going to be different.” How do we—like the ancient Odysseus—tie ourselves to the mast?
There are those, in similar desperation, who argue that since our creditors were accomplices of those administrations, we shouldn’t pay our debts to them. I accept the theory of complicity, at least on the part of the intermediaries, but I think we should punish them much more harshly, by canceling the entire debt and never again taking out another loan.
What can ordinary citizens do who want to and have to go about their daily lives and can’t be continually overseeing the government? The same as any company: they can refuse to provide their management with authorization for contracting debts. Along these lines, a doctrine is now being discussed in the world according to which, if the debt was contracted by an illegitimate government, or for uses that were clearly of no benefit to the country said debt could be declared odious and, as such, would not be legally demandable.

Dear friends, if we are going to do right by our children, our grandchildren, and our great grandchildren, and return the country we borrowed from them in good shape, maybe we should take advantage of such a possibility and declare our foreign public debt eternally odious. Given that threat: Would creditors dare provide us with loans? What would the credit-rating agencies say? Or let us be even more clear about the message and amend our constitution to say that the government of Venezuela has no authority to borrow from foreign sources, that any attempt to do so is illegal, and hence that all such illegal debts will not be repaid. That should stop foreigners from lending us money!

Translated from El Universal, Caracas, March 25, 2004

Odious Credit

I recently wrote about odious foreign public debt, that debt about which there is a current debate in the world as to whether it can be legally repudiated if it is taken on by illegitimate governments or for illegitimate ends.

The other side of the coin is odious credit. Please don’t think I’m against banks—quite the opposite. But I respect the role of the financial middlemen too highly to keep quiet when they are not doing their job right. In 1981, the representative of a foreign bank in Venezuela showed me a letter in which his boss instructed him to “give credit to the INAVI, Venezuela’s National Housing Institute. It’s the worst public institution, which means that it pays us the highest rate and, as you know, in the end it’s just as public as the best of them and Venezuela will have to pay up just the same.” Odious credit, isn’t it?

The first thing a good banker should ask a client applying for a loan is what is it for and if the answer is not satisfactory he should reject the application, regardless of the guarantees offered. Simple plain-vanilla fraud of the Parmalat kind will always exist, but the asinine way all their creditors fell into the trap makes one suspect that this is only the first case of systemic risk in the banking system: tempted by the regulators in Basel, banks subordinate their own criteria to those dictated by auditors and credit raters. This development, bad in itself, is even more serious in the case of public credit, where the what it’s for is being replaced by how much can be carried, perversely derived by calculating the level of sustainable public debt.

When I call for the total elimination of foreign public debt (which is feasible and would not require huge sacrifices in an oil rich land like Venezuela) my colleagues often argue that a certain level of debt is good and necessary for the country. This does not convince me, since it makes debt sound like electricity that must be kept at a certain voltage. Because public debt must always be paid back, regardless of whether anybody ever knew what or whom it was for, I’m fighting for the day when the private sector in Venezuela can return to the markets, freely, without having to carry that huge monkey—foreign public debt—on its back.

In my opinion, the Benemérito (the dictator Juan Vicente Gómez (1864–1935) who ruled the country between 1908 and 1935) deserved great credit for ridding Venezuela of her foreign debts He certainly knew that to shake off that vice more than patches or pieces of chewing gum are needed.

From El Universal, Caracas, April 22, 2004

The citizen’s minimum minimorum on opinions.

Anyone has the right to opine in anyone’s name... that is an integral part of the freedom of opinions.

Most of those opining in the name of the citizens independently of whether the citizens opine so or even have an opinion are usually known, collectively, as the civil society, and this even when they behave somewhat uncivil.

In this respect and though it should be the duty of most citizens to opine on matters of their concern, but which unfortunately they most often do not, the least we should ask from them, as a minimum minimorum, is that they should be informed about what the civil society is opining in their name.

Stress test the American taxpayer and you’ll see you need a brand new generation of taxes

What the US dollar bill really should state is “In the American Taxpayer We Trust” and so the more pragmatic Americans have printed the “In God We Trust” on it.

There is no way that the current American generation, having been brought up as the consumers of last resort in the world, would now turn around and accept to be the world’s taxpayers of last resort… at least not with the current taxes… any stress-test of them would show you that.

The US government should be much more conscious of this before launching itself on a fiscal spending stimulus binge which, if allowed by the markets, will build up its public debt to a totally unsustainable level.

That said I believe the international markets are going to say NO much earlier than that, since one thing is to be searching for a safe temporary haven and another quite different to be trapped in a permanent home.

And that is why, before the US Dollar loses its AAA rating, that the US, and the world, should work hard in developing a totally new generation of taxes that can be perceived as legitimate, that are aligned with the new global realities, and that interfere as little as possible with the functioning of a competitive economy. I have argued for the following two:

1. The Intellectual Property Right tax: Society, for many good reasons, has decided it needs to award and defend intellectual-property rights. The downside is the creation of temporary monopoly rights that can be overexploited. Also, awarding these rights impose on society the obligation to defend them, which costs money.

As it does not seem fair to assess taxes on a business venture that has to compete in the market without any kind of protection at the same rate than projects that have been awarded intellectual-property rights, there should be a special tax levied on all profits generated from intellectual-property rights.

2. The keeping the big lean tax: There is nothing wrong with a business striving to obtain a large market share but while its market share grows for all the good reasons and for the benefit of society, there is unfortunately also an accumulation of market power that can acquire monopolistic characteristics with negative results for the society. Therefore there is also a need of a tax that is of a progressive nature based entirely on market shares.

Protest Sign

Après nous le déluge !

The baby-boomers

Learning about main street USA

I have quite a good idea of how this crisis was caused by the top-down supervisory forces that originated in the Basel Committee and I have frequently written and discussed about that in articles papers and blogs.

But as a foreigner who’s wellbeing as a foreigner depends so much on the United States I wanted to understand better what bottom-up forces had been or are still in effect on the main streets of the USA and so I signed up to get myself a license in real estate sales and a license as a loan officer in mortgages. If all goes as planned I should be licensed for both in just a couple of weeks.

Below what has surprised me the most while studying for the above.

How a country that prohibits discrimination allows for discrimination based on some opaque credit scores, to such an extent that parents often seem to worry more about their children credit scores than their school grades.

How federal authorities can be allowed to finance different amounts depending on the region when that can only lead for those differences to grow even bigger. If I was a major of a small and remote and poor city I would sue the FHA for discrimination.

How an entity like the FHA can come up with such a haywire criteria that establishes that those who do not meet some minimum credit scores or are currently unemployed cannot refinance their current mortgages at lower rates on a streamline basis. These borrowers are really those who would benefit the most from a refinance so much that one could almost make a case for the opposite... those employed and with scores over a number should not be allowed to streamline refinance.

On a closely related issue how can the Government, the Congress and the Fed be spending so much time and resources trying to provide stimulants without worrying about getting rid of the depressants such as the ludicrous high interest rates on credit cards?

To me, a country where the government pays 10 basis points in order to finance its short term consumption while its own citizens have to pay at least 1690 basis point more to finance their consumption is sort of an unsustainable country. If it was me I would limit the interest rates that credit card companies could charge to for instance 7% and, out of the public budget, pay an additional 2% to the credit rating agencies on the balances as part of the stimulus package.

But then again I would always favor the workers getting those salaries that allow them to pay for their needs in cash… it is bad enough to having to buy everything in the store of the mining company… but it is much worse when having to buy it on credit... at 17% or more.

Why stimulate before making sure the economy as a whole will enjoy it?

I just received a letter from one of those big banks that has recently received billions of dollars in official assistance, informing me that if I finance my purchases with my credit card my annual interest rate will be 17% and, if I enter into any default, 26%.

This in a country where there are no inflation expectations, the government is paying less than 1% on its short term borrowings, contemplates a close to a trillion dollar stimulus package and wants the consumers to spend more to keep the economy from falling.

For a consumer to finance the anticipation of any purchases at 17% would be an act of extreme irresponsibility.

For someone in default having to pay 26% will only guarantee to dig him deeper in the hole he is in. The only way to justify these extraordinary high rates is that they need to compensate for all those who should not have been given a credit line to begin with.

What is going on? Have we not learned anything? And why should anyone stimulate the economy before making sure that all the new green sprouts are not going to be devoured by some players in the financial sector?

Implementation, implementation and implementation

Many are pushing for satisfying the pro-markets with lower taxes, or the pro-government with deficit spending and both directions could create an abysmal fiscal hole. Very few are concerned or much less busy with the more mundane but more vital issues of implementation, implementation and implementation. If lower taxes or government spending do not generate the right kind of sustainable demand or the right kinds of projects in sustainable sectors, in a fiscally cost effective way, inaction will always be the better option.

The AAA-bomb

There are those who feel that the current crisis is a direct result of economic imbalances and they most certainly have very good arguments.

But then there are also some, like me, who believe that the financial sector and its regulatory system stopped the normal market mechanisms from working, among other by luring funds into the mortgage sector which financed the growth of further imbalances, so as to cause a crisis, of this magnitude.

Certainly nothing of this sort would have happened without the economic imbalances that provided the enriched uranium, but it was the financial sector that turned it al into an AAA-bomb.

Please, do not stimulate until you USA drop.

The US consumers shopped until they dropped and now it seems that their government is taking over with “we will stimulate until we drop”. We understand the reasoning but we can’t help feeling nervous about it.

There are seminars on “How to restore Global Financial Stability” but, in the name of the do-no-harm principle, let us not forget that the most important role for the US is to preserve the global financial stability we still have, namely the current role of their dollar in the international financial system.

Many American economists egged on by some foreign economists indicate, even in the face of the many surplus countries wanting to reactivate their own domestic demand, which leaves less resources to buy US debt, that there is absolutely no problem in sight…Let us pray they are right!

But, just in case, and especially after the unsettling recent experience with the adjustable mortgages, could we not ask the US to build up its debt with long term paper at fixed rates? I mean allowing so many to anchor their boats so close to the exit of that safe-haven the dollar currently represents seems not the wisest thing to do.

PS. Do all those who propose stimulation know for sure the whereabouts of the economy’s Gräfenberg spot or are they just boasting?

I do not like this race!

The world is witnessing an extremely dangerous race between the build up of US public debt in order to create all kind of bailouts and stimulus packages to save the world from a monstrous depression; and said debt becoming so unsustainably large that it will by itself cause the mother of all meltdowns. Many hold that the only thing that could help avoid a tragedy is the serious collaboration from all current surplus countries to reactivate their economies, expecting this would generate the counter-flows that will help to stabilize the US debt at a serviceable level.

Is running this suicidal race the world’s only option? Some very reputable persons seem to think so as they egg on ever larger stimulus packages with ever more resulting debt. To back up their arguments, they have shamelessly recruited Keynes into their camp… though I am not at all sure that a resuscitated Keynes would be on their side was he aware of the stakes.

I myself would perhaps be more agreeable to risk it if convinced that, if victorious, the revived economy expecting us was worth it, but, thinking of a revived economy that could just have more Chinese consumers buying more cars somehow does not make me overly enthusiastic.

No let us not look for our economic health where we lost it let us look for it where we want to find it… and that place is not in the land of ever growing public debt.

What impact on development could the asymmetry between NGOs have?

Is the asymmetry between the developing and the developed countries made worse because of the asymmetry between the weak and often subordinated NGO’s from developing countries and the strong and often in command NGO’s from the developed countries?

I say this because I have often found it so hard for activists from developing countries to understand that the stability they look for in their natural desire to keep all that they have gained under their belt, has nothing to do with the risk-taking a developing country needs in order to place at least something under its belt.

I have also often found that some agendas of the NGOs of developed countries, though most often certainly representing worthy causes, not only differ but can also turn into outright distractions from the more practical development agendas that NGOs from developing countries would wish to pursue, if on their own.

There are a lot of discussions about much needed governance reforms at the International Finance Institutions, the IFIs. Please remember that those reforms might have to include their relations with the NGOs too.

Is it real or bluff stuff?

The G-20 Statement of November 15, 2008 says “Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage…”

What more discipline could they want than having imposed on the markets as a Governess Fraulein Credit Rating Agencies and that later turned out to be so crazy as to send them of to the subprime swamplands? Do they really believe that finding a better qualified Mary Poppins, or a Maria will do it? Scary! Why don’t they leave the banks alone so that they learn to depend on themselves instead of following as a herd any agency that no matter how good it gets, is bound to take them, and us, sooner or later, over a cliff?

“Adverse impacts on other countries”? Like when the supposed global good of a credit rating agency turned into a global bad and caused a German bank that had never awarded a mortgage in Germany to be the first casualty of this subprime mortgage having followed the AAA signs looking for high risk-weighted returns in California?

“including regulatory arbitrage? Are we now finally get rid of the current “minimum capital requirements for banks” that has created such a damaging and useless regulatory arbitrage on risk…whatever that is?

The G-20, do they mean what they say, do they know what they say, or are they just bluffing?

Micro-financing… for what?

We need to define better what the purpose of the micro-finance institutions should be. If it is to help small entrepreneurs to get financing at as good rate possible, them I am all for it. If it is to accelerate the consumption of the poor, but by applying higher interest rates than the risk free rate, which effectively means them having to pay a present value premium for their consumption, which will just make them poorer, then I am all against it, since that is not what development is all about!

Many of the problems of this sector are derived from that instead of working on how to make microfinance help development, it has been taken over by those more interested in developing the microfinance institutions per se, which though quite legal and normal is something absolutely different.

Leverage!

Civil Society can help turn millions into billions.

Financial regulators turn billions into trillions.

Let us keep our eyes on the gorilla!

In God We Trust to see that…

The dollars, for which value the US is responsible, are printed with the abbreviated prayer of “In God We Trust”.

A more complete version would be “In God We Trust to see that the politicians and the bureaucrats do not print and circulate more dollars that what the economy could back or, otherwise, that the American taxpayer finds it in him the capacity and the willingness to pay taxes so as to make up any shortfalls.”

Let us rescue Caveat Emptor!

The implied warranty of fitness given to us by the credit rating agencies has not served us well, especially when the issuers of the warranties now inform us that they give us their opinions under the protection of the First Amendment, and that they cannot therefore be held responsible for their opinions.

It is obviously high time to rescue the Caveat Emptor principles in financial regulations, though in fact it seems that the market has been doing so on its own lately.

Let us never forget that the current crisis did not result from the market investing in badly awarded mortgage loans to what is known as the subprime sector but from investing securities collateralized with such mortgages and that received a prime rating.

To get to common ground we must fight common distance.

The other day when listening to a new appeal for finding “common ground” but that implicitly sounded subtitled “as long as it is on my ground” once again I had to reflect that the only way for us all to be able to reach the common ground we so urgently need is to start by getting rid of our “common distance”

The keeping the big lean tax

No matter how optimistic we can be about that all the assets the US government acquires during the current financial crisis will be fairly priced, there is no doubt that the whole crisis is going to be extremely expensive for the public sector. The costs will have to be paid by taxes or, in its absence, by inflation.

In this respect society has a vested interest in finding new equitable ways of how to pay for it, and that these are aligned with the new global realities and interfere as little as possible with the recovery of the economy. The following is a second proposal that follows up on “An income tax on profits from intellectual-property monopolies.”

The keeping the big lean tax: Tax progressiveness based on market share.

There is nothing wrong with a corporation striving to obtain a large market share. Indeed since it is the result of having a better motivated and better organized commitment to exploit comparative advantages in order to satisfy the market with better products or services at better prices, the fight for more market share benefits us all.

That said, while the market share grows, for all the good reasons, growing market powers might tempt the corporation to use competitive tools of dubious nature which could diminish the marginal returns for the society, to such an extent that they could perhaps even turning into costs that erode all previously obtained benefits.

I therefore propose we introduce tax progressiveness based on market shares. For instance if a corporation has below 10 percent of market share a 30% income tax rate applies but, if it has a 100 percent market share then it should be taxed at for instance a 50% rate, with a linear function for the in-betweens. Alternatively, if we want to avoid making the “after-tax” subsidies of inefficiencies higher it could be a progressive sales tax.

Of course the market share tax is not be applied to those corporations who have the financial returns on their activities otherwise regulated, such as the electricity distribution companies.

Of course in banking where the bigger-you-are-the-more- it-hurts-when-you-fall-on-us, a tax on size should be immediately applied, before we run out of the small local banks that do not need the credit rating agencies to know us.

The human heritage dividend:

No matter how optimistic we can be about that all the assets the US government acquires during the current financial crisis will be fairly priced, there is no doubt that the whole crisis is going to be extremely expensive for the public sector. The costs will have to be paid by taxes or, in its absence, by inflation.

In this respect society has a vested interest in finding new equitable ways of how to pay for it, and that these are aligned with the new global realities and interfere as little as possible with the recovery of the economy. The following is one proposal.

The human heritage dividend: An income tax on profits from intellectual-property monopolies.

Most—perhaps all—intellectual-property rights are awarded to the runner of the last leg in a relay race run by generations of human beings and depending on their ingenuity, creativity, and sheer efforts. The earlier runners allow the new laureate to cross the finish line victoriously, and then hold up the trophy for a finished idea, but not for its start.

Most often, even though you might hope you are running the last leg, there can never be any real certainty about that. Sometimes running the last leg (or any leg) can be easy; sometimes it requires much effort by a large team, and it costs billions in money. Society, in order to stimulate the ingenuity, the creativity, and the sheer effort of all the runners in the relay, and thereby help to take the world forward, has decided it needs to certify the intellectual-property rights of the winner.

The downside of this arrangement is that all intellectual-property rights awarded create a monopoly right that—as it can be exercised with little or no regulations, restrictions, and oversight—can unfortunately and quite easily be overexploited.

Also, since all intellectual-property rights awarded impose on society an obligation to defend and enforce those rights in many ways which costs money, the question remains whether it would not have been better to use these resources for other purposes like financing some of the other runners in the relay?

I find no logic or justice in assessing the taxes of a business venture that has to compete naked without any protection in the market at the same rate as a project that has been awarded the monopoly of an intellectual-property right, one to which prior generations of humanity have contributed and in legal defense of which the society invests much money.

I therefore propose that all profits generated from intellectual-property rights should pay an excess-profit income tax, something like 20%, with half of these revenues used to reimburse society for the costs of defending the intellectual-property rights, and the other half employed to help finance the other runners in the human relay, especially those developing vital goods that can serve us all.

A second proposal: A market rate based progressive corporate income tax.

My minimum minimorum on exiting Iraq!

I was never in favor of the invasion of Iraq but, once it occurred, I pleaded for a scheme that would put its oil revenues directly into the pockets of all the Iraqis, and thereby set an example that could help to empower the democracy in all the other countries that are cursed with the centralization of their oil revenues… the mother of all oil curses. Unfortunately, the supposed builders of democracy forgot to bring with them to Iraq such a fundamental building block.

Now, when exiting Iraq, as a minimum minimorum, we should at least aspire that the next Saddam Hussein, whenever he will appear, should not find it easier to be the next Saddam Hussein… much the same like the next Bush, whenever he will appear, should not find it easier to be the next Bush.

http://www.policyinnovations.org/ideas/commentary/data/000083

Discrimination based on the financial profiling and risk-based pricing

Risk-based pricing actually requires creating the misinformation that allows for making borrowers who should get lower rates agree to pay the higher rates that cover the losses of those that should not have been given credit… at least not at these high impossible rates.

Risk based pricing, which is similar to placing persons that after some doubtful genetic test are presumed to be especially exposed to an illness in a separate insurance pool, could be causing much of the growing social inequality that is currently attributed by some to globalization. Risk profiling, for a discriminatory purpose, is prohibited in most spheres of our social relations, except in lending where it is very much cheered, by most.

John, Paul and Peter, because of FICO have to pay high interest. John, though he might have been able to do so at lower rates, is not able to service the debt and loses. Paul, utterly responsible, services it, barely, and Peter who is in this group because no ones no why meets the payments with ease. Question: Any winners?

John should for a starter not have been given the credit, at least not at the high rate, and both Paul and Peter, having been able to service the debt at high rates evidenced de facto they merited lower rates. Answer: No winners! Except of course those who are not to be named!

How libertarians can shut up about the financial information cartels that chain the markets to neo-non-transparent-regulations, I have never understood.

How developed countries’ progressives can shut up about the discrimination implicit in risk based pricing and that could be introducing more inequality in the societies than what they sometimes attribute to globalization, I have never understood.

Vulture funds

I might not like it too much if a vulture-fund-manager invited any of my daughters out to celebrate a killing in Zambia debt but, having said that, neither am I so sure that the world would be a better place without the vulture funds.

That some can find opportunities in buying uncollectible loans and squeeze fortunes out of them when others have decided to clean up their books, is just part of the circle of life, and part of the same market mechanism which signals how much, or how little, the loans are worth, since the price of a loan indicates the expectations of collecting on an outstanding loan and not the expectations of collecting on a “pardoned” loan. Yes, the vulture funds are into an ugly business, cleaning up among corpses, but, by their sheer presence, they might perhaps even help to reduce the number of infections and consequent deaths.

Most, or perhaps all of the scholar papers on restructuring or condoning of sovereign debt, state as the explicit purpose of the whole exercise, that of enabling the countries to regain access to the international capital markets again, something which reads like the torturer waking up his fainted victim in order to start all over again.

In this respect, if you need to pick on one, you might also choose to do so at that moment of the circle of life when the new born debt-overhang-ridden country gets thrown out to start defending itself again from the many dogs-of-finance roaming out there, and often guided by the same old lousy government that previously messed it up.

There is so much written about freeing up the countries in order for them to access the markets while comparatively so little about how they should go about to avoid repeating the same mistakes, and so perhaps I should also frown when it is a regular investment banker, or a good hearted MFI banker, or even just an over-illusioned activist who knocks on my door and asks for my daughter.

A letter to the European Executive Directors of the World Bank Group

Dear Friends

As a former Executive Director at the World Bank; as a Venezuelan citizen of European descent; as a holder of a passport of a European country; and foremost as someone who harbors a deep respect for the international workers and profound concerns about the future of the world at large, I respectfully ask you to consider the following:

No matter how the Chairs at the World Bank's Board of Executive Directors are realigned between countries that are all anchored to their local interests the fact is that the world itself, our planet earth, will never be sufficiently represented.

Given the ever more intensive cross border relations, in so many vital affairs, there is an urgent need to introduce at least some representation of truly global interests and perspectives at the Board; such as those represented by the migrant working communities and which if all added currently represent an economy the size somewhere between India and China.

Unfortunately there is no way something of this nature could be handled expeditiously through a process that requires political negotiations over the whole world; and so in this respect I ask of the European Executive Directors at the World Bank, to take turns lending out, just one year at the time, their respective shares and voting powers in order to accommodate the continuous presence at the Board of the World Bank of a Chair that represents the views and the interests of the migrant working communities.

The previous, which of course does not imply a permanent commitment or a final reallocation of shares, would allow Europe to speedily enact a pilot on global governance that could prove to be extremely valuable for the whole world.

Europe is of course free to use whatever procedure it feels appropriate for naming the Director for the migrant worker's community; and although we would all understand if this at first would perhaps favor the migrant working communities in Europe, or Europe's own migrant worker communities, we sincerely hope that, in time, other parts of the world are also provided an opportunity.

Yours Sincerely

Per Kurowski

Does prudence in banking really have to mean purposelessness?

What is more prudent for the bank regulators, to work exclusively at avoiding the default of banks and the occurrence of a bank crisis, or to ascertain that the banking system serves a purpose for the society?

These days when it has been demonstrated that the bank regulators are failing in their self imposed limited scope of functions; and indeed through the creation of the current structure of minimum capital requirements for the banks and the appointment of the credit rating agencies as risk commissars have themselves contributed to create new systemic risks, is it not time for us to take a big step back and, before digging us deeper in our regulatory hole, ask ourselves what is the purpose of our banks?

Aren’t you as fed up as me having a purposeless banking sector? If we absolutely have to live with risk avoidance based regulatory system, can’t we at least start measuring units of default risk in terms of decent jobs created, youngsters educated or environmental threats avoided?

Risk is the oxygen of development and so please let us not kill risk taking!

Dani Rodrik’s misguided activism on the use of international arbitration

Dani Rodrik in an article he circulated through his blog and titles “Thinking about governance” dated March 24, 2008 has the following to say about international arbitration.

“Suppose your growth economist identifies a poorly functioning legal system and the attendant uncertainty as one of the binding constraints on growth. One solution of the “governance-in-the-small” type is to “outsource” part of the country legal system to the outside world. The government can accomplish this, for example, by signing on to bilateral investment treaties (BITs) with major trading partners. These typically have arbitration clauses that enable foreign investors to seek redress under foreign jurisdictions in a variety of circumstances. One can presume that such clauses increase the comfort factor for foreign investors and that they may therefore help overcome the identified growth constraint. But is this strategy also good for governance-as-an-end? Probably not. Aside from creating an unhealthy distinction between domestic and foreign investors—the latter have the extra protection but the former don’t—such outsourcing of legal powers does nothing to strengthen domestic legal institutions. Insofar as it removes an important source of pressure for legal reform, the outsourcing may even delay the establishment of a healthy judiciary.”

I am sorry. I always listen carefully to what Dani Rodrik has to say and I usually agree but on this issue he sounds too much like your innocent and friendly neighborhood activist, or a consultant to governments, and his conclusions are, using his terminology, far from being first or second best.

Rodrik’s argument that the use of international arbitration does create “an unhealthy distinction between domestic and foreign investors”, ignores that most often those differences exist anyhow; and also that “the outsourcing may even delay the establishment of a healthy judiciary”, when it could just as easily help it along, by shoving it into the face of local investors how unfairly they are often treated by their own governments.

Of course the existence of local justice is of utmost importance, but so is the existence of a strong international systems that can help to settle disputes, since no matter how you look at it, in the long run it is always the weaker who will benefit the most from having access to well functioning international justice…since the strong is strong even without such systems.

Please, let us not confuse the tremendous, shocking and hurting disappointments that many development countries might have had with the international grievance mechanisms, with the fact that many or most of the contractual obligations brought up to arbitration were drawn up without properly considering the implications of having to submit to these mechanisms.

Instead of throwing away the international grievance mechanism with the bathtub water, help the countries to learn from their experiences and so they will duly consider the real implications next time they sign up a contracts with a foreign investors.

Much the contrary from what Rodrik holds, if our governments in many developing countries learn that they won’t get away that easy, they will also learn, little by little, that’s the pace of development, to negotiate better and more seriously… and from this it is very clear that the local investors are the one who stands most to benefit, long term.

Remittance fees: The tip of the tip of the tip of the iceberg

The remittances are to migration like the part of the cash dividends from corporations that you send to your grandmother and children are to the economy… just the tip of the tip of the iceberg!

Of course the cost of sending those remittances can only be the tip of the tip of the tip of the iceberg.

There has been an incredible fixation by many institutions with the fees charged by the banks for the service of making the remittances. Yes, of course it is good that these fees become more competitive but it is almost laughable to think about all the resources used up in analyzing this very minor issue in an immigrant’s reality.

Just the money spent on communicating by telephone with home, or buying yourself over the borders, or the costs derived from not having a driver license and living in cramp living quarters, surpasses by far the sum of all the fees paid to the banks. So please stop talking so much about the fees, and help the immigrants to make more money instead… with which they would happily pay even higher fees to the banks, if so asked. Talk about shortsightedness!

That is what I said over and over while I was an ED at the World Bank; and that is what I wrote in my book Voice and Noise; and that is what I kept on saying thereafter in all the many conferences on remittances that I have assisted to… to the extent that I now almost feel embarrassed for them.

Yet, years later, I still have to be asking: How many more millions in research, conferences and publications are the development institutions to waste on this really silly and minor aspect of the migration issue?

Please help the migrants make more money instead!

A good lender or just another kneecap breaker?

There are a lot of recent writings that tells you that financing the downtrodden is good business. No news there! Scrooge and the mafia have known that for a long time. If you can get an average rate of interest high enough so that the good debtors cover the bad …you’re in business.

Suppose a group A of 100 borrowers and you lend to each one of them $1000 and that in order to cover your costs you would need to charge an interest of 10% if all of them duly repaid their loans. Then, if you charge a rate of 11 percent to all your profits would be $1.000 equal to 1% on your total lending.

But if a group B has 10 per cent of the debtors not repaying anything then you would need to charge 23.3 percent to net the same $1.000 in profits. For a group C, where 30 per cent of the debtors do not paying back any principle or interest, the interest rate applicable needed to obtain the same results need to be 58.6 percent.

As a lender you get exactly the same profit from lending to any of these groups but let me assure you that for those borrowers who do service their commitments paying 11 percent or 58.67 percent is far from same.

Most, if not all of the current analysis of the activities of micro-credit institutions, do not consider the above and so they do automatically conclude that lending to the groups A, B and C has the same development impact, notwithstanding that group C leaves 30 per cent more of its members suffering from not being able to service their debts and the capable having to pay 47.6 percent more in interest rates than if they had been, correctly, de-facto, placed in group A.

It is time that we refine our evaluation systems so as to include in the analysis of the micro-credit finance institutions their respective repayment distribution curves. Otherwise, we will not be able to separate the good lenders from the kneecap breakers. Otherwise we are more than showing any solidarity with the downtrodden forcing internal solidarity upon them just to make a buck.

For instance I invite you to read the document that you could find in CGAP’s web site Measuring Microcredit Delinquency: Ratios Can Be Harmful to Your Health or any other documents, to see if the perspective of the final clients, the borrowers, have been given due considerations.

I cannot say whether CGAP is actually considering this dilemma issue but, if so, it certainly does not seem to be a high priority issue for them; something which could have to do with having too many “bankers” in CGAP to allow for development, different from the development of microcredit institutions, to be considered sufficiently. In micro credits, just like in any other activity, the legitimacy of the profits is also direct function of how they are obtained.

We urgently need a carbon-solutions-neutral advisor

Like the obese compulsive eater reaching for his sugar substitute it is amazing to see the growing divergence between how serious our global environmental problems are reported to be and the type of solutions that are put on the table.

As long as you think that you could throw some ethanol, some solar panels, some windmills, some “clean” coal slogans or some recycling of unsold-food-into-energy on those problem… well then it cannot really be that bad.

As long as hurting the environment is considered just venial sins that you can take care of by buying some carbon indulgences… well then it cannot really be that bad.

As long as you could argue to developing countries that they have the right to expect developed countries to foot the bill for confronting their environmental urgencies instead of being forthright telling them not to count much on that and to get cracking… well then it cannot really be that bad.

One of our problem is not so much realizing how serious the environmental problems really are but of how to keep all the green-magical-solution potions peddlers from meddling... which means something like the environment being too serious to be left in the hand of environmentalists.

At this junction what the world needs most is a carbon-solution-neutral agency sufficiently capable and credible to spell out the truths… like for instance that the US has to impose European levels of taxes on gasoline consumption if they are going to get anywhere… and that given the scarcity of resources there are thousand of solutions that are more economically effective than hybrid-cars.

The World Bank does seem as the natural place to host such an agency but this of course could require some shake, rattle and roll, as can be exemplified by the fact that in the Energy Efficiency Portfolio Review and Practitioner's Handbook published by the Global Environment Facility (GEF) and of which the World Bank is one of the implementing agents, there is not a single phrase that defines what on earth, on the earth, energy efficiency really means.

Also in all documentation related to the development of an Investment Framework for Clean Energy and Development I challenge anyone to find a definition of what is meant with clean energy… most probably because that could lead to a more precise definition of what is “dirty energy” which would be quite uncomfortable for some.

Friends, a truly carbon-solutions-neutral advisor would probably not allowed biofuels to even show up for the casting.

My Voice and Noise on the financial sector during the spring meetings of the World Bank and the IMF, April 2008

Risk is the oxygen of development!

It is absurd to believe that the US and other countries would have reached development without bank failures. When the Basel Committee imposes on the banks minimum capital requirements based solely on default risks, this signifies putting a tax on risk-taking, something which in itself carries serious risks. The real risk is not banks defaulting; the real risk is banks not helping the society in its growth and development. Not having a hangover (bank-crisis) might just be the result of not going to the party!

We need to stop focusing solely on the hangovers and begin measuring the results of the whole cycle, party and hangover, boom and bust! The South Korean boom that went bust in 1997-1998 seems to have been much more productive for South Korea than what the current boom-bust cycle seems to have been for the United States.

All over the world there is more than sufficient evidence that taxing risks has only stimulated the financing of anything that can be construed as risk free, like public sector and securitized consumer financing; and penalized the finance of more risky ventures like decent job creation. Is it time for capital requirements based on units of default risk per decent job created?

When is the World Bank as a development bank to speak up on this issue on which they have been silent in the name of “harmonization” with the IMF?

When are we to stop digging in the hole we’re in?

The detonator of our current financial turmoil were the badly awarded mortgages to the subprime sector and that morphed into prime rated securities with the help of the credit rating agencies appointed as risk surveyors for the world by the bank regulators.

If we survive this one and since it is “human to err” we know that if we keep empowering the credit rating agencies to direct the financial flows in the world, it is certain that at some time in the future we will follow them over even more dangerous precipices.

Note: I have just read the Financial Stability Forum brotherhood’s report on Enhancing Market and Institutional Resilience and while including some very common sense recommendations with respect to better liquidity management and “reliable operational infrastructure”; and some spirited words about more supervision and oversight (the blind leading the blind); with respect to the concerns expressed above, bottom line is that they recommend we should deepen the taxes on risks and make certain that the credit rating agencies behave better and get to be more knowledgeable… so that we are more willing to follow them where we, sooner or later, do not and should not want to go.

Do micro-credit institutions make too much use of “predatory ratings”?

Any group of debtors that is charged a higher interest rate because it is considered a higher credit risk is composed by those spending their money servicing a debt that they will finally default on, and those who should have in fact deserved a lower interest rate. Are there any real winners among them?

Who is out there talking about that the extensive use of ratings signifies something like a regressive tax for the poor? Who is out there informing the poorly rated about how very dearly they are paying for their loans? Who is out there analyzing the murdering impact that credit ratings have in chipping away at the minimum levels of solidarity that any society needs to keeps itself a society?

If there is a minimum of things that needs to be done in the world of micro credits that is to focus more on transparent system of incentives that: 1. Stimulates and rewards good group behavior and returns to the compliant borrowers some of the “extraordinary” margins earned. 2. Spreads out the costs of those who cannot make it over a much wider group of debtors.

And, by the way, this applies just the same to the financing of mortgages to the subprime sector.

Inclusive financial systems, though generally good, could also be dangerous for the poor

If you have to pay a higher interest rate than what the average borrower pays, you should be extra careful with what you borrow for, as this could otherwise set you back even more.

For instance, if you want to buy a house that has a market value of $100.000 and have the $12.000 for a down-payment, you need a credit for the balance of $88.000. Let’s suppose that you could for that purpose access a 15 years fixed rate mortgage but, because you are considered a subprime risk, your lender requires a very high interest rate of 11 percent, which would require you to pay 1.000 dollars per month.

Had you qualified as a good risk and therefore could have access to for instance a rate of only 6 percent, then your $1.000 monthly sacrifice for the next 15 years would, in present value terms, be worth $118.500. From this we can deduct that if you bought your house under current conditions, at 11 percent, and did not wait until you could access to a 6 percent rate, then you will in fact have paid $130.500 for the house ($12.000+$118.500).

This is a sad truth often forgotten. Of course broad-based and inclusive financial systems can significantly aid financial development, reduce poverty, and expand economic opportunity in developing countries… but sometimes their embrace can also be a bit too rough for many of the poor.

Every time anyone pays a rate higher than the risk-free rate in order to purchase goods or services he is in fact accepting paying a higher price for these and which is of course not the surest way to get out from poverty. If anyone needs to be made aware of this it is the poor in the world.

Many subprime mortgage borrowers in the US are currently suffering from too much inclusiveness and will be made poorer as a result. They harbor no doubts on that they would have been much better of had they been excluded, and there are important lessons to be learned from that.

The World Bank, CGAP and other who share the mission of fighting poverty, after so many years of focusing almost exclusively on the access to finance and the stability of the financial system, need to pause, take a breather, and completely rebalance their approach to these issues.

As a bare minimum we need real proof that these programs have indeed reduced poverty in a sustainable way and not just opened up new opportunities for financiers. As a bare minimum “Financial education of the poor” needs to appear among the strategic priorities…currently it does not!

This has not only to do about guaranteeing that the interest rates are reasonable but also with the fact that even taking on debt at reasonable rates might be extremely unreasonable.

Personally I feel there are too many bankers and too few debtors (perhaps none) included in the above programs, and that is a guaranteed way to introduce bias.

If knowledge suffices then wisdom is worthless

If knowledge suffices then wisdom is worthless and sure enough our bank regulators placed more value on knowledge than on wisdom; which is the only way how you can explain such foolish behavior as empowering the credit rating agencies with so much power over the financial flows of the world.

See where this has gotten us. All the very sub-prime awarded mortgages to borrowers that classified as subprime would have not been able to go anywhere had they not been blessed as prime collaterals for other securities.

One reason that stops the world from realizing the foolishness of it all is that the credit rating agencies are private, and we have all been pavloved into establishing a connection between private and free efficient markets. The truth though is that the private credit rating professionals are only outsourced bureaucrats working for some pompous Ministry of Financial Risk Elimination.

Do the financial risks add up to a constant number?

I am no physicist and one my biggest frustrations is how little I really get to understand of what the greatest thinker that has coincided with my life span, Albert Einstein, explains. Therefore I might be completely off the wall when I refer to having heard something like that the mass of the university, though it can take many shapes, is by the end of the day always a constant number.

Nonetheless these line of thoughts have lately crossed my more financially oriented mind when exposed to facts that seems to suggest that no matter what we do with the risks, no matter how we hedge them, no matter where we hide them, at the end of the day their amount could remain a constant. If this proves correct then it must have great implications for how we design or perhaps even abandon our efforts to design our regulatory systems. At least it would not be so easy for our current bank regulators to go into their total immersion of risk adverseness, expecting to be applauded, if we knew that all they were doing was pushing the risks around.

We must allow our banks to be banks again

Our commercial banks besides being able to repay our deposits are supposed to help generate the economic growth that creates decent jobs and to distribute the opportunities in the society to those most able…otherwise a mattress would suffice.

Bank regulators, through the Basel Accord, 1988, and all the ensuing regulations, created a methodology for calculating the minimum capital requirements of the banks that was exclusively based on the perceived risk of default in their lending operations. And they followed it up by appointing the credit rating agencies as their commissars or official risk perceivers.

The above immediately created a world of opportunities and perhaps even needs for regulatory arbitrage and which has now degenerated in the current state of general and absolute incomprehension about what is going on.

The promised risk elimination has just turned out to be the hiding and the dangerous accumulation of risks. In my country whenever there is a tremor everyone applauds as they help to keep the big earthquakes away, but Basel is only managing to keep the tremors away.

To further evidence the current confused state of affairs in developing countries we see how the banks finance more and more the public sector and securitized consumers instead of entrepreneurs; and in develop countries we frequently find more courses that analyze how credit rating agencies might change their opinions about a firm than courses about how to analyze the finances of a firm.

Now if we are ever going to have a chance of getting out of this mother of all the financial imbroglios there cannot be much doubt that we urgently need to start doing some back tracking on our current bank regulations… and allow our banks to be banks again.

There are risks in shying away from risks

Friends and development experts, would you please comment on the following

When the Bank Committee of Basel decided on the minimum capital requirements methodology they loaded up new expenses on the credits already more expensive because they were perceived to be of higher risks and this resulted in the introduction of a regulatory bias against risk taking in the commercial banking sector.

It is indeed sad when a developed nation decides making risk-adverseness the primary goal of their banking system and shies away from risks and places itself voluntarily on a downward slope, but it is a real tragedy when developing countries copycats them and also fall into the trap of calling it quits.

More from this perspective on http://www.subprimeregulations.blogspot.com/

There is a dangerous regulatory arbitrated run towards safety

Credits which are perceived as having a lower risk than others have a natural market advantage that translates into lower interest rates. But the bank regulations that have been developed by the Basel Committee on Banking Supervision, by applying minimum capital requirements based on the risks perceived by the credit rating agencies, have added through their regulatory arbitration an additional and artificial benefit that biases the market in favor of "low-risk" credits.

The above is producing a run towards either a more objectively "safe portfolio" or providing further stimulus for "risk-hiding". Since the largest needs for development do not ordinary make a living in the land of the low risks it is clear that development finance is the largest victim from this run and we could even say that the development power of the commercial banks in developing countries has as a result been severely diminished.

But also developed countries will pay for this, not only as already evidenced by the subprime-mortgage mess, but also since no society can survive as viable maximizing risk avoidance. As I see it our future generations will pay dearly for this baby-boomers invented run to safety.

Do we then need two World Banks?

Krishna Guha and Eoin Callan in the Financial Times of September 13 and in reference to a report on the role played by the World Banks internal anti-corruption unit the Department of Institutional Integrity (INT) were told by Paul Volcker, the main responsible for that report, that “his inquiry had ‘reconfirmed’ there was ‘ambivalence’ in the bank as to whether they really want an effective anti-corruption program or not”.

Wrong! Having been an Executive Director at the bank (2002-2004) I sincerely believe that an overwhelming majority of the bank staff clearly comes out in favor of more and better anti-corruption efforts but that these do not come into fruition only because part of the management, rightly or not, believe that these could hinder the bank from operating efficiently… at least as they wish for it to operate for whatever reason efficiently.

If we discuss “ambivalence” then perhaps we should also discuss what Volcker’s report does not touch upon and that is perhaps the single most outstandingly ugly blemish on the World Bank’s reputation. To see what I refer to please search out INT on the external website of the World Bank and then click on the list of Debarred Firms and Individuals. On that list you will find, duly named and shamed, the names of many individuals that one way or another after a due process have been considered involved in corruption, but that list does not include one single name of those officers of the World Bank that presumably must also have been involved in these acts of corruption one way or another. Susanne Folsom the Director of INT, on a Q&A session on that same site mentions, “We’re often asked why we don’t publicly name Bank staff who are terminated for fraud and corruption as well. The Bank’s rules don’t allow such disclosures….” What credibility can you get naming others while not being willing to name your own?

It might very well be that the “ambivalence” on anti-corruption in the World Bank is insurmountable but if so perhaps what we need is to have two world banks since the world definitely needs one that comes out completely and unabridged against corruption. And mind you I am far from being a zealot on this issue, since life has taught me well that zealousness frequently carries within its own even more dangerous breed of corruption.

Please...while you are busy leaving Iraq

Subprime banking regulations

As an Executive Director I got invited to make some comments at a "Risk Management Workshop for Regulators: Assessing, Managing and Supervising Financial Risk" arranged by the World Bank in Washington during the week 27 April – 2 May 2003. This is what I told them about the credit rating agencies.

“I simply cannot understand how a world that preaches the value of the invisible hand of millions of market agents can then go out and delegate so much regulatory power to a limited number of human and very fallible credit-rating agencies. This sure must be setting us up for the mother of all systemic errors.”

I never got invited to speak to them again.

You could read more on this subject in my blogs:

http://www.subprimeregulations.blogspot.com/ and

http://teawithft.blogspot.com/ looking up under the labels of credit rating agencies and subprime banking regulations.

And why does not the US use the World Bank for their infrastructure needs.

Felix Rohatyn and Warren Rudman in “Federal action is needed to rebuild America” Financial Times August 23, come out in support of a proposal for a new bank to address “the critical needs of infrastructure”. This, at least in Rohatyn’s case, being from the private sector sounds a bit surprising. But, if they are right, why would the US need a new bank for that? … when there is International Bank for Reconstruction and Development, IBRD, better known as the World Bank.

Not only would the US by using the World Bank set a great example and help to scale that institution for some really big globalized action that might be needed but also, at least for a start, the World Bank would probably be quite covenant lite… sorry I mean conditionality lenient with the US.

The local web correspondent

I have an idea that I am going to present to the press and other media and just in case I can patent it or at least to avoid that someone else patents it am jolting it down here and I will publish somewhere on one of my many blogspots.

I believe that a newspaper that creates a special very local page for local communities such as condominiums, senior resident homes, companies and other and then appoints a member of that community as its local correspondent is placing itself in a privileged position to defend its interests in these difficult times. The local correspondent would work for free though special identifications and rewards like giving out some prizes to the best of them and raffling other prizes among them would help to stimulate them.

The local webpage where only members of the community can be registered will be a part of the medias overall page.

Alternatively communities themselves could set up their own page and negotiated their linkages.

"The local web correspondent" Copyright Per Kurowski

"The community web correspondent" Copyright Per Kurowski

Odious debt should not be granted relief while odious conditions remain.

I am a citizen from a country that I consider corrupt and that needs to change a lot before any new debt could do it any good.

In this respect I urge you not to give debt relief to corrupt governments as that will only allow those addicted to debt to be able to hit the bars again, in the same shameful ways as before.

If the concept of odious debt is applicable in the sense that some debts should not have to be repaid if contracted in an illegitimate way, castigating the creditor, then the same concept should clearly also apply to the granting of any debt relief, punishing the debtor.

The World or Mother Earth lacks representation

Wolfgang Münchau in “This gentlemen’s agreement fails Europe too”, Financial Times July 9, makes a good case for why Europe by splitting up the European representation in international institutions such as the International Monetary Fund (he argues that it is to preserve many plum jobs) ends up in fact with having no real representation at all.

I understand and agree with his point of view especially since it goes hand in hand with my opinion that since all the votes, and all the Executive Directors, and the Presidents, and so many of its staff are assigned on pure local considerations, it is the “international world”, the global order, or mother-earth itself, whatever you want to call it, that ends up being the most under represented party in these global institutions.

If we are going to be able to manage the global challenges it is urgent we look for means to break away from our parochial local chains. What about splitting at least 50% of the chairs at the Board among varied constituencies such as migrant workers, multinationals, media, educators, environmentalists, NGO’s, accountants, farmers, manufacturers, service providers, and so on?

The only constituency that has currently a representation in IMF, in fact a 100% representation, is the constituency of central bankers and this need to be changed. Europe, if you must insist on naming the next managing director in the IMF then at least do the world the favour of appointing some finance knowledgeable person that has never worked for any central bank. That would provide us with much more needed diversity than just appointing another central banker based on the local consideration that he is from Asia, Africa or Latin America.

And this is really no joke, as incest is about the most dangerous limiting factor when it comes to impede clear thinking and effective actions.