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 19 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 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 Basel Committee regulators, would be so incredibly inept!

So here are the reasons... for now 19 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.

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.

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.

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.

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?

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. 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.

Wednesday, April 27, 2016

There’s a great way to fight climate change and inequality, but since it leaves profiteers out, it will be opposed

I proposed a new $2 per gallon of gas tax. That, by helping to lower the consumption of gas, and thereby of carbon emissions, should be great in the fight against climate change.

And I also proposed that all revenues from that gas tax, should be paid out equally to all citizens, in a sort of first step of a Universal Basic Income scheme, which should be very good in a fight against inequality.

But, if so good, why are the chances that become a reality so slim? The simple answer is that it would not provide profit opportunities for the climate change and redistribution profiteers.

Friends, if we are serious about fighting climate change and inequality, we must be serious about keeping the profiteers at bay. 

Fighting against climate change and inequality takes a lot of money and, if we also have to satisfy profiteers while fighting, we simply might not have enough money.

Saturday, April 23, 2016

A SDRM must begin by defining “odious” credits and borrowings. Also, when should capital receive anonymous asylum?

The world no doubt needs a Sovereign Debt Restructuring Mechanism but, if that is going to help the citizens of the world, which it primarily should do, that must begin by making very clear the difference between bona-fide normal credits and borrowings, and odious credits and borrowings.

And at what moment should somebody's capital classify to receive anonymous asylum? For instance would someone escaping from North Korea be able to do so?

Friday, April 22, 2016

Must we respect central bank’s independency even if they go crazy and statist?

What is this with QEs injecting huge amounts of money buying government debt because that is supposedly safer? Who on earth can believe government bureaucrats know better what to do with other peoples’ money than citizens with their own? 

What is this with negative interest? Just months ago the elderly were to retire later, in order for their sacked by the government pension or social security funds to be able to pay them something… and now they are to retire as fast as possible to get at least something? 

What on earth is this with the risk weights that determine the capital requirements for banks? 100 percent for the citizens, and zero percent for the government? They’ve got to be kidding.

What on earth is this with the risk weights that determine the capital requirements for banks? Higher when financing the riskier future than when refinancing the safer past? Just wait till our kids find out! 

Are we sure we have not packed our central banks with Chauncey Gardiners?

PS. Since I now do not even trust the pilots, I don’t want Helicopter money any more, just a Universal Basic Income.

PS. 2006 Long-term benefits of a hard landing

Monday, April 18, 2016

Don’t let redistribution profiteers raise your expectations. In offshore centers there are no shining treasures, only documents.

With relation to Panama, the Mossack Fonseca affair and offshore centers in general how many articles do not begin with something like “The wealthy conceal their cash”?

That gives the impression of an Ali Baba cave where fabulous unused treasuries are stored and that if only these could be recovered from the 41 thieves everyone would live happily ever after.

What devious bullshit! What exists in those offshore caves is a load of documents that gives the holders of these the ownership of a lot of assets, almost all of these to be found onshore... for instance stocks, property in London or municipal infrastructure bonds.

Granted, the ownership of some of those assets is incorrect, since in not so few cases they should belong to the governments… but that is another issue that has little to do with the assets as such.

And many of those assets are the result of loopholes… but who can throw the first stone holding that using loopholes is an odious behavior.

If you hate loopholes, I do, fight for their removal, by for instance making tax laws simpler, better and fairer.

But in the same vein we have corporations who, egged on by smart tax-lawyers, intensely exploit the opportunities loopholes provide, let us not forget that on the opposite side, we most often find redistribution profiteers waiting to lay their hands on new business opportunities.

For instance if we want to redistribute wealth and income, the most efficient way would be through a Universal Basic Income scheme, at a cost of 2 percent tops, but that leaves many of the redistributes asking "what’s in it for me?"... and so they oppose it.

If for instance we imposed a big carbon tax and distributed its revenues equally to all as a part of Universal Basic Income then we would align beautifully the fight against inequality and climate change, but a lot of the mercenary soldiers in the wars against climate change and inequality, would also ask… what’s in it for us?

Profiteers surround all wars, no matter the cause. It is impossible to avoid them, but let us at least try to point out their theoretical existence.

And please when I refer to “profiteers” I do not only speak of those who collect their profits in cash. Much much worse are those demagogues and populists who collect their profits in political power… like the late Hugo Chavez did.

PS. An interesting question is what represents more money deposited in offshore centers: that from tax fraud and evasion or that from stealing tax revenues?

Tuesday, April 12, 2016

Here are some proposals to help our children and grandchildren have a better future than what is painted for them now.

First of all, we need to get rid of the credit risk weighted capital requirements for banks. 

These allow banks to hold less capital against what is ex ante perceived, decreed or concocted to be safe than against what is perceived as risky; which allows banks to leverage much more with “the safe” than with “the risky”; which allows banks to earn higher risk adjusted returns with “the safe” than with “the risky”; which means the banks will lend too much to “the safe” and too little to “the risky”; which means the banks are not any longer financing sufficiently the riskier future, they are only refinancing the for the short time being, safer past.

If we are to distort the allocation of bank credit to the real economy, let us at least do that with a good social purpose. In this respect we might benefit from introducing pro-SDGs and pro job-creation capital requirements for banks.

And since I believe that any redistribution of income and wealth managed by governments, becomes just too expensive because of all the redistribution profiteers involved, we should launch, as soon as possible, a Universal Basic Income scheme. 

That would be great: for the wealthy, as they would need to distribute less or at least get more bang for each buck handed over; for the poor, since they will get more much more net result of any redistribution; and for fiscal transparency, since it will help separate the redistribution functions from the ordinary tasks of government.

And finally, if we also fund such Universal Basic Income scheme with carbon taxes, then we will beautifully align the incentives in the fight against inequality with those of climate change.

What are we waiting for?

Helicopter money? Why should we trust the pilots?

Sunday, April 10, 2016

The wealthy and the poor should all be interested in a Universal Basic Income scheme

What is a Universal Basic Income? It refers to a payment, made for instance monthly, to all citizens, without any differentiations based on wealth and income.

The wealthy must know that' some voluntary redistribution must occur, in order to stop involuntary redistribution from happening, and so they know that some Pro-Equality Tax on wealth and income is lurking around the corners. In this respect they have a vested interest in that the redistribution is done as cost effective as possible, so that the redistribution needs are minimized.

The poor have also a vested interest in that the redistribution is done as cost effective as possible, so  they get the most out of the redistribution.

And to top it up, the redistribution could help the real economy, and so that the wealthy could perhaps fast recover what was redistributed from them.

And to top it up, with the resulting increased demand, the poor can help the real economy to provide them with jobs and, hopefully, with opportunities for also them become wealthy.

The direct cost of redistributing by means of a Universal Basic Income should be 2 percent… tops! What current distribution performed by any government can compete with that?

That some who received the Basic Universal Income might, because of wealth and income, not merit it? So what, they only gave a gift to themselves, at a cost much less than what they ordinary pay for a tip.

Now who could be against all that? The usual redistribution profiteers of course.

Besides a Pro-Equality Tax, there could be are many other good alternatives to how to fund a Universal Basic Income scheme.

It could for instance be funded by carbon taxes, which would help us to align the fight against inequality with the fight against climate change… and thereby also keep the climate change profiteers at bay.

And since we can almost be sure there will be lot of structural unemployment in the near future a Universal Basic Income begins to respond to the needs for worthy and decent unemployments.

And all that would provide us one great additional benefit. By keeping the social redistribution functions separate, we could have a better and more transparent oversight over how the government is performing its other functions... and that would help us to keep the government profiteers at bay, and increase our chances of getting good governments. 

It’s a win, win, win!

PS. In my country Venezuela the poor did not get more than tops 15%, of what would have been their per capita share of some incredible oil revenues. That is why I have had enough of redistribution profiteers to last me several lifetimes. That is why I have defended net oil revenue sharing among  all citizens for soon two decades, which is nothing but a (variable) universal basic income funded with oil revenues.