Tuesday, October 25, 2016
Someone answered: "If owner says $200m & you think it's worth more, then you buy it for $200m, else you tax it 1/2%/yr"
I answered: If you buy it for $200m then you used $200m you could have otherwise given the poor
And I answered: And if you tax it 1/2% year... how many will then want to own a $200m Picasso?
And I concluded: So in essence he who hangs a $200m Picasso painting on the wall, has paid a $200m wealth tax.
Or clearer yet: He who has agree to freeze $200m of purchasing power hanging a Picasso on a wall, has he not paid a $200m wealth tax?
Saturday, October 22, 2016
The Basel Committee’s risk weighted capital requirements for banks, is one cultural genocide of the western world
Frequently we read about how the destruction of monuments amounts to cultural genocides. But are monuments all there is about cultural heritages? No! Also such heritages as a cultural willingness to take risks.
In 1988, with the Basel Accord, Basel I, regulators introduced risk based capital requirements for banks; which were further amplified in 2004 with Basel II.
That regulation allows banks to earn higher risk adjusted returns on equity when holding “safe” assets, than when holding “risky” assets.
The layer of regulatory risk aversion it introduced, made banks abandon financing the riskier future, in order to just refinance the safer past and present.
The willingness to take risks is part of the cultural heritage of my western world, in churches we sang a psalm that prayed for “God make us daring”.
The willingness to risk making mistakes, has provided the western economies with the raw material necessary for the successes that helped to buildup its economy.
“A ship in harbor is safe, but that is not what ships are for.” John A Shedd
But now: “If God can’t make our bankers sufficiently coward, then we have to!” Bank regulators
In short, the Basel Committee for Banking Supervision’s regulatory imposed risk aversion, constitutes a destruction of a cultural heritage of our western world.
And all for nothing! The regulators justified it with that it would make our banks safer. What nonsense! Major bank crises never ever result from excessive exposures to something ex ante perceived as risky; these always result from either unexpected events, or excessive exposures to what was ex ante perceived as very safe, but that ex post turned out to be very risky.
“May God defend me from my friends, I can defend myself from my enemies” Voltaire
Sunday, October 16, 2016
Walking around the museum Louvre in Paris I suddenly I saw an amazingly decorated silk embroidered full with gold filaments shield, made around 1555-1560 by Pierre Reddon for King Charles IX.
I then asked myself who in his sane mind would request this type of absolutely useless shield? Clearly it had to be someone extremely wealthy and powerful, someone who did not care one iota about his own security being threaten on a close range, or about its enormous costs.
In that moment it suddenly dawned on me that basically nothing of what I was seeing at the museum would exist, if it had to be produced by a society were income and wealth was equally distributed. In other words, all this art around me, to have become a reality, has actually required a very unequal society.
In other words, shhh... between you and me...the museum of Louvre is, unwittingly, a homage to inequality.
So are all those of us who with good intentions are fighting for a more equal society truly aware of what we could be giving up, of all unexpected consequences, if we were too successful?
I then tweeted: What would Thomas Piketty’s France exhibit at Louvre, had not huge societal inequality allowed the financing of so much "unnecessary" art?
Then of course you find cases like Vincent Van Gogh who did not require much inequality to give us his marvels, much more of a loving brother.
PS. That’s not only at Louvre just go to the BritishMuseum.
PS. Without inequality the world would never ever have been able to see a Fabergé egg.
Would that have been a better world? I don’t know. You tell me! At least we would not have to envy that some got more impressive burial gaskets than us.
Tuesday, October 11, 2016
Should there be clawbacks clauses for university professors? Yes! Especially for finance professors.
University professors have been able to earn much higher salaries thanks to the availability to their students of credit for education.
Now many of their students are struggling to repay their loans, because market conditions, and the economic benefits of education, did not turn out as expected.
So clearly there is a case to ask whether there should not be some claw-back clauses applicable to them
I surely think so, and especially in the case of the professors in finance.
There, right before their eyes, with Basel I in 1988, and with Basel II in 2004, the bank regulators introduced risk weighted capital requirements for banks.
And these regulations discriminated against that financing of the riskier future that the students needed to be financed in order to aspire to get good paying jobs; and those regulations discriminated in favor of the safer present that had grown out of the risk-taking of the past, and which was of more interest to soon retiring professors.
I believe that never ever before, has an education community let down its students so much.
There’s just got to be some formal claw-back.
PS. Here again is an aide memoire that explains some of the regulatory monstrosities.
Monday, October 10, 2016
Ideas on how to start discussions and implementation of a Universal Basic Income, or Societal Dividend
We must all be aware that the Redistribution Profiteers will be out on force trying to confuse the discussions on Universal Basic Income.
Therefore I believe some very few principles needs to be established and firmly held on to.
First that we are always talking about a “basic” universal income that in no way should reduce the incentive of people to try earn some additional income. In essence it could initially be argued as a complement to the gig economy.
The UBI should start to be tested in low amounts that are slowly moved upward in line with the experiences.
It should be clear from the very start that all UBI needs to be funded with real money… no funny inflationary money. Initially it should be funded exclusively with taxes already collected; although special taxes like on pollution could also be useful to align UBI with other important objectives.
From the very beginning we need to identify who could provide the payment services in the cheapest way possible.
And then of course it needs to be clear that UBI is NOT a government handout. It is a societal dividend decreed by all the shareholders, all the citizens.
Friday, September 23, 2016
I will keep here my reflections on the subject in Kenneth Rogoff’s book “The Curse of Cash”. (For full disclosure I have yet not found the time to read it in its entirety)
In my comments I will often also refer to Professor Rogoff’s blog.
Kenneth Rogoff writes: “But for all the advantages of cash, we have to recognize that the current system is badly off kilter. A lot of central banks and finance ministries know it, as do justice departments and tax authorities.”
I fully agree, 100%, but do “We the People know it? There are reasonable and unreasonable doubts out there. And I am not 100% sure among which of those mine could best qualify.
Should not abolishing larger anonymous practical ways of storing wealth have to be subject to something like a referendum? I have no idea?
Yes cash might cause some local tax evasion, but does anyone really believe that big tax evaders keep their fortunes in cash like some seem to say? I just know that the word “cash” is open to all types of confusions (that are sometimes exploited)
Cash in hand, if devalued, looses its value equally for all. Non-cash can be devalued discriminatorily. Do we want our grandchildren to be subject to such great Big Brother power? As a Venezuelan, not me for sure!
Cash, as can oil, can indeed be a curse. But does that mean that we in Venezuela should stop extracting oil? I don’t think so.
And how would the elimination of for instance $100 bills, that might represent about one trillion dollars take place? I have no clue.
Would it not just dramatically increase the value of other assets? Not much, it seems like peanuts when compared to what is done with Quantitative Easing.
Do I want cash to assist drug trafficking? Of course not, don’t be silly.
Rogoff writes: “but most world holdings of dollars are in the underground economy (crime and tax evasion). I am not sure. First of all because I do not agree that all underground economy must be either illegal or bad. Then because I think criminals have many alternatives of how moving cash into something else. Moreover, much cash might make even many hardened criminals nervous.
Thursday, September 22, 2016
I just want to add a factor that I feel has been ignored in all the ongoing debate on how low or even negative interest rates can stimulate economic activity.
During my life as a financial and strategic consultant, I have often seen how the pressure of the interest-costs-clock on projects, have really inspired these to get going, to execute fast. In other words, low interest rates can also inspire laziness.
What a great deal! Take loan at negative interest rates... do nothing... stay in bed... repay... and profit!
Wednesday, August 31, 2016
A “risky asset” yields more, let us say 15%.
A “safe asset” yields less, let us say 5%.
And those yields would be deemed by the market as equal risk adjusted yields.
And market participants would buy those assets according to their needs and risk appetites.
But then came the Basel Committee for Banking Supervision with its risk weighted capital requirements for banks, more risk more equity – less risk less equity, and that completely distorted the allocation of bank credit.
Because now banks could leverage their equity more with safe assets and thereby obtain higher risk adjusted returns on safe assets than with risky assets.
As a result the overall market demand for safe assets increased, and that of risky assets decreased. That “risky asset” yielding 15% before, might now have to yield 16% or more. That “safe asset” yielding 5% before, might now just yield 4% or less.
Is this good? Of course not! Regulators, probably without even understanding what they were doing, altered the free market’s risk assessments; causing dangerous overpopulation of safe havens; and, for the real economy, equally dangerous under-exploration of the risky bays where SMEs and entrepreneurs usually reside.
The net result of it is:
Crises, like that of 2007-08, resulting from excessive exposures to what was perceived, decreed or concocted as safe, like AAA rated securities and loans to sovereigns (Greece)
Stagnation, resulting from all the stimulus, like that of QEs, not flowing freely to where they are most needed, but only populating more and more the remaining safe havens.
In other words this damn piece of regulation has our banks no longer financing the riskier future but only refinancing the safer past; and so we are doomed to doom and gloom, and to run out of safe havens.
Of course, having set the risk weight for loans to sovereigns at 0% and to We the People, the regulators also introduced, through the backdoor in 1988, a powerful pro-statism tool.
The distortions are not even acknowledged by the regulators, much less discussed.
God help needing pensioners and job seeking youth! God help us all!
PS. If you have understood this and want more details on the greatest regulatory faux pas in history you might want to read the following more extensive aide memoire.
PS. Here are some of my past explanations for dummies.
PS. Today 50% of my constituency, my grandchildren, gets to be 5 years old.
PS. Today 50% of my constituency, my grandchildren, gets to be 5 years old.
Wednesday, August 24, 2016
In 1988, suddenly, without asking anybody, least us citizens, bank regulators, for the purpose of setting the capital requirements for banks, decreed the risk weight of the sovereign, the government, to be Zero Percent, while the risk weight for We the People was set at 100%.
Not having to hold capital against sovereign debt permits banks to lend to government at lower rates; which translates into a regulatory subsidy of government debt.
Then in response to the 2007-08 crisis, itself a result from distorting bank regulations, central banks launched quantitative easing, which basically meant injecting liquidity into the economy by purchasing government debt; and for example the Fed has ended up with about of US$ 4.5 trillion in government paper.
Much of the liquidity injected went to prop up real estate, bonds and shares, but a lot of it spilled over into more demand for government paper.
Naturally, interest rates for public debt fell, and many, like pension funds, in order to adjust for their liabilities, had to purchase even more public debt.
And while regulatory subsidies of public debt are kept in place, this vicious circle will continue.
And to top it up, too many “experts” now advance the argument that government should take advantage of these low interest rates, to launch infrastructure projects.
Let me be very clear about it, the fact that government might (artificially) even be paying a negative rate on its borrowings, does not mean it should borrow, because it is still very capable of investing those funds in projects yielding even more (real) negative rates.
I do not know how we got to this point, whether by accident or whether a set up by runaway statists. You tell me!
PS. When utilities were being privatized in South America, I often heard accusations in terms of “savage neo-liberalism”. Since these utilities were not adjudicated to whoever offered to serve us citizens the best and the cheapest, but to whoever offered to pay the government the most, a tax advance that left us with a huge bill to pay at private investment rates of return, to me those privatizations were much more an expression of sadist statism.
The solutions I offer are ignored. Might it be because these provide too little business to expertize and redistribution profiteers?
Before the 2007-08 crisis there was some economic growth resulting from a big expansion of credit, which was fed by some very low capital requirements to banks and that allowed these to, in some cases, leverage their equity over 50 to 1.
Then disaster struck, as a consequence of excessive exposures to what had very little capital requirements, like loans to sovereigns (Greece), investments in AAA rated securities and the financing of houses.
In panic, floods of money, for instance by means of QEs, were poured over the economies, with little results to show for it, and now, the most important world economies, are stuck. Any additional stimuli, be it by means of public borrowing for infrastructure projects, QEs or low or negative interest rates will only complicate matters much more... like for pension plans.
The truth is that trying to get strong and sustainable economic growth, while keeping in place credit risk-adverse capital requirements for banks that exclude SMEs and entrepreneurs from fair access to bank credit, is just impossible.
What to do?
1. Very carefully remove the risk-weighted capital requirements for banks that distort the allocation of bank credit to the real economy. In order to make sure banks have sufficient capital while adapting, and that credit is not constrained, central banks could offer to purchase some of their bad portfolios, with the understanding that no dividends would be paid until these portfolios had been repurchased by the banks. (See what Chile did)
2. Create new demand (and lessen inequalities), by means of 100% tax-funded Universal Basic Income schemes. One of these could, if funded with carbon taxes, also help with environmental sustainability.
I have been arguing against the risk weighted capital requirements for banks for soon two decades, and I have explained many of its mistakes over and over again. I have yet not been able to obtain one single answer from those responsible, like from the Basel Committee or the Financial Stability Board. Could it be because they have no answers?
Or could it be that my counter proposals are too straightforward, to simple, and would therefore erode the earnings potential of bank regulators (and consultants), of climate change and inequality fighters, and of the general expertize and redistribution profiteers?
Or is it that I just don’t know what I am talking about? It could be, though I think I can prove I do know by means of somecertifiable early opinions on these issues.