Pure water and Dostoyevski

I recently had to travel to Washington on business. On the flight from Miami I was handed a small picnic-like bag that contained the modern substitute for the traditional on-board meal. I suppose this is aimed at cost reduction. For obvious reasons, which by the way are widely shared, I was never much of a fanatic of this service, so the modernization of the same is neither here nor there for me. I did find, however, that negotiating an extra bottle of wine out of a picnic bag is far more difficult that doing so out of a stewardess.

What inspired some of the following comments was the bag’s content. The bag included a bottle of pure, natural water and a “globalized” menu made up of a Manhattan deli-sandwich, Dijon mustard and Tortilla Chips.

The water is contained in a clear plastic bottle, good but costly. Its label told me that the water originated, and is bottled, in France, vintage ’98 and can be consumed safely until July 27, year 2000. (What should one do in August of year 2000?) It also included a bar code, which evidently makes logistics easier, considering the fact that the product must be transported long distances from its source to the ultimate consumer.

On the backside of the bottle, another label gave me valuable information as to its “Nutritional Content” broken down into units per serving, which in this case is exactly equal to the content of the bottle, which is 11 fl. oz. or 330 ml. The information is as follows: Calories = 0; Total Fat Content = 0 gm. = 0% of the Daily Value (DV); Sodium = 0 mgs. = 0%; Carbohydrates = 0 gm. = 0% of the Daily Value (DV); and Proteins = 0 gm. = 0% of the Daily Value (DV). All was, as one should expect from water although, curiously, no info at all was provided in respect to its purity.

While I drank the water, I read a special supplement of The Economist magazine which addressed the issue of international commerce and developed the fundamental thesis that the world should continue, come hell or high water, to develop free and open market programs. I am a sincere and avid defender of free and open market principles and if the possible benefits are analyzed in the traditional terms of "bicycles and wheat" I have absolutely no problem.

However, if this means that in Venezuela, in order to reap the benefits derived from free trade, we have to create the conditions that allow for the sale of non nutritional French water, instead of the equally non nutritional Venezuela water, something which borders on fanatism, then, perhaps, The Economist and I must be referring to a free trade or an aperture of a different sort.

As we landed in Washington, I concluded that any business or economic development policy, that leads to substitute the cost of a stewardess for the cost of a particularly expensive bottle of water, is really not adequate for Venezuela. Actually it isn’t adequate for anyone.

My arrival in Washington coincided with the annual meeting of the International Monetary Fund (IMF). This year the meeting was particularly high profile as a consequence of the global economic crisis that is already affecting many countries around the world and threatens to continue to expand.

In terms of human suffering and sacrifices, we have already begun to understand the horrible implications of this crisis. From Japan, the press relates the terrible drama of a collective suicide of three businessmen, all husbands and fathers, due to bankruptcy as a result of recession. In Venezuela, our citizens are already paying their dues as a result of the fall in oil prices. 

In Washington, I observed on a daily basis, almost to the point of nausea, the pressures applied on an otherwise apparently successful President, as a result of sins caused by possible excess in libido. Being from another country I would not want to judge their reactions but I do believe that this debate centers on the American society’s need to see to it that responsibilities are assumed (accountability is the appropriate buzz word).

Much of the discussion during the IMF meetings centered on what is called the “moral hazard”. The argument maintains that by helping stricken countries we are actually simply helping speculators to avoid massive losses and keeping them from suffering the punishment they deserve. As a result, they will surely be tempted to incur in the same errors over and over again.

All in all, the economic crisis, Clinton and the moral hazard created in Washington a real Dostojevskian scenario, reinforced by the fact that one of the TV stations, in what I considered an extraordinary sense of timing, was announcing the upcoming airing of "Crime and Punishment".

Against this background I noticed, somewhat surprised, that the faces at this year’s meeting of the IMF, were the same as those present at previous meetings, as if nothing had occurred. Could it be that Venezuela and to complement its export of beauty queens, has managed to come up with a new non-traditional export called “impunity”?

Regulations as enemies of bank missions

Note: Now soon 25 years later, when hearing about efforts to regulate cryptocurrencies, something which will clearly dilute the “caveat emptor”, the “buyers beware” principle, again I find reasons to refer to this article.

In Venezuela, much has been discussed about the solvency of the financial intermediation entities, mainly banking. In virtue of the great attention paid to the subject of banking regulation throughout the world and our recent banking crisis being quite recent, this should not surprise us.

In the debate I think, it is important to remember, that the functions of the financial sector are not limited, simply, to return the money received from its depositors, since, if so, the traditional mattress could be sufficient to fulfill this mission.

Apart from providing other opportunities, which serve to stimulate national savings, as well as fulfilling the task of facilitating monetary flows, there are two other functions, of great social importance, that banks must comply with. The first is to be a very active agent in the process of generating wealth and the second, to collaborate in the function of democratizing capital, that is, allowing access to capital to those people who, lacking resources, have initiatives and will to work.

Supposedly, with the commitment and ability to fulfill these last two functions, the creation and distribution of wealth, both the application and the approval of a banking license were justified. How far is it from being true today! Next, I present some reflections on the subject.

In 1975 John Kenneth Galbraith, in his book entitled "Money, his origin and destiny", advanced the thesis that one of the fundamental reasons, for the past century was achieved, the economic development of the West and the Southwest of the States United, it was the existence of an aggressive and unregulated bank, which frequently broke down, causing great losses to individual depositors, but which, because of an agile and flexible credit policy, left a trail of development.

As for the democratization of capital, it is clear that the new banking regulation, now more than ever, obliges the bank to lend to the one who has and refuse as a credit client, the one who does not. The days when a banker, on the simple basis of a character trial, could approve a loan, without having to incur the cost of creating reserves, which presumes in advance the non-payment, went down in history."

Of course, with the foregoing, I do not refer to the immense amounts consumer loans. Today, we can question the wisdom of the regulator, noting the ease with which a consumer gets a loan and compare it with how difficult it can be to acquire a loan for productive purposes.

The saddest part of the regulatory chapter is that it never really immunizes us against risk. Even in portfolio based on probabilistic expectations and compensations by means of high interest rates we know that, one way or another, risk remain… and in many cases even trying to regulate, runs the risk of giving the impression that by means of strict regulations risks have disappeared. Sometimes it's in good faith... sometimes it's only faith. When for example the SEC (Venezuela) arrogantly presumes of performing a significant mission, we know it is pure baloney.

Frequently, in matters of financial regulations, the most honest, logical and efficient is simply alert to alert about the risks and allow the market, by assigning prices for these, to develop its own paths.

I do not propose, not for a moment, that the State abandons completely the regulatory functions, much the contrary, what I propose is that it assumes it correctly. History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages. In the case of banking regulations developed to be applied in developed countries, I am not sure we are doing our country a favor adopting them with so much fervor.

But what are we to do? Regulations are fashionable and there are many bureaucrats in the world trying to find their little golden niche. I just read an article about a county in Maryland, USA, where, in order to be able to work as an astrologer and provider of horoscopes, you need to be registered and obtain a license in order to “read the hand palms. The cost of such license is 150 dollars.”

PS. And indeed the Basel Committee's risk weighted capital requirements has caused infinite damages.

PS. The page with the details of Maryland certified astrologers has disappeared, it might have been an early case of fake news :-( Now the certification is issued by AFA Certified Astrologers - American Federation of Astrologers

Economía Hoy

http://subprimeregulations.blogspot.com/1998/10/la-regulacion-como-enemigo-de-la-mision.html

The bad habit of external public debt

I am amongst those who believe that one of the most important reforms we can bequeath to future generations of Venezuelans would be that of forcing the country to begin a gradual but real amortization of its external public debt. When the latter reaches zero, we should then constitutionally prohibit new indebtedness.

I consider this perfectly justifiable due to a) the dreadful experience we have had in the past with our public debt; b) the fact that even the slightest improvement in the country’s economic climate incites the international financial sector to press more loans into our hands; and c) the fact that it must be very difficult for our leaders to resist the temptation of reaching out for those new resources.

The arguments are simple and unsophisticated. As such, they are of little help in the battle against the thesis, universally accepted, that foreign debt is absolutely necessary in order to maximize the development of a nation. This thesis is even considered applicable in countries like Venezuela, which receive resources from sources other than debt that amply surpass its capacity to digest them efficiently.

I obviously believe in access by the private sector to the international capital markets. If there were no public external debt, the market conditions in Venezuela would be very different from those we have today. Today’s conditions could be summarized as being 3% over a country risk factor of 20%. It is difficult to take on debt in Bolívares at 70% interest even when there is the “hope” that inflation or devaluation will erode the real cost of the debt. It is virtually impossible to contemplate debt in Dollars at 23% interest when taking into account that inflation in the United States is somewhere around 2% per annum and the world threatens to hit us with recession.

Today, every politician agrees with the thesis that we should shrink the size of the public sector and reduce the number of public employees. The majority of them are in favor of the “bit-by-bit” method, arguing that these layoffs should be implemented only when the private sector creates the offsetting job opportunities. The classic case of the chicken or the egg!

The private sector will only be able to be the motor of development when the mortgage of the external private debt that indirectly taxes its activities is removed. We cannot expect the help of banks and the international financial entities with this task. For decades, we have heard their calls for the reduction of the public sector while, with the same breath, they request the Republic’s guarantees in order to lend resources to the private sector.

One of the main worries the common Venezuelan citizen harbors is that solutions to the mismanagement of our current public debt, such as the partial sale of PDVSA or Citgo, will only contribute to the continuation of the orgy of bad administration of the State. I am sure that if we managed to implement a credible constitutional prohibition that will assure the population that our national debt crisis will not be repeated, it would be possible to reach a consensus.

The key word, of course, is “credible”. If we have learned anything from our past experience with modern democracies, it is that they have an immense capacity of altering their course in order to satisfy short term aims. Today we may applaud the prohibition mentioned above. Tomorrow they would probably look for our applause to lift the same prohibition.

A proposal such as this one, evidently has many natural enemies. On top of our leaders that like to win votes by using easy money, we also find the bankers that wish to place their resources, easily, with high yields and with “safety”.

When we say “safety” we mean that in our unreal world, a banker that lends funds to a private sector company that then goes broke due to the government’s erroneous policies, puts his job at risk while the banker that only lends to the government, thereby abetting those very same policies, normally does so without risking his personal hide.

There are other enemies, not necessarily natural ones. These maintain that is in unpatriotic to limit the State’s attributions. These enemies can be recognized by the ease with which they maintain in the same breath that the actual debt is bad but that future debt is good. We remind these people that to govern while recognizing human failings and thereby avoiding further damage cannot possibly be unpatriotic.

To continue to believe egoistically that the next government, or the one after that, will not repeat the same errors is surely treason. If there is one nation in the world that can attest to this fact, it is Venezuela. The immense resources from the country’s oil production has not contributed much to the country. Certainly, the debt it has contracted has not contributed at all.

About bad trust and good distrust

About bad trust and good distrust 

Once again, the international financial classification agencies are speaking out about Venezuela and everyone is trembling. Its results constitute for many foreigners and, unfortunately, also for some Venezuelans, a primary source of information about the country. The debate on concepts, such as trust and international capital mobility, begins again. I take this opportunity to present again some evidence, reflections and conclusions in this regard.

Evidence 1: There is no doubt that the vast majority of actors in the short-term speculative capital market respond, to all types of events, like a stampeding herd of buffaloes, entering or leaving a country. The above causes high volatility in these funds, which are correctly called swallow capitals.

Reflection 1: As in so many other fields, in finance, the rule also governs that errors committed by many of the participants and therefore shared, are forgiven, while those, committed alone, are punished. As a result of this, the professionals who manage these funds and who wish to save their own professional prestige will be prone to go with the flow, that is, their actions will obey more to fashionable financial criteria and not to what may be indicated. your own experience or instinct.

Conclusion 1: According to the above, it is perfectly irrelevant that professionals are “geniuses”, since other reasons guide their actions.

Evidence 2: The global debt crisis of 1982 caught many bankers with their pants down, indecently exposing huge amounts of bad loans. More recently, we can name the obvious errors contained in the reports on Asia 18 months ago.

Reflection 2: I remember my astonishment at the reverence with which, in 1983, the “qualified” opinions of those same bankers, who had so recently demonstrated the limitations of their genius, were heard. The same thing happens today. Could it be that the human need to seek order in the world drives us to attribute magical knowledge to a group, which they brazenly exploit?

Conclusion 2: The truth is that the world is very naive when it places a good part of its economic destiny in the hands of people with “such a good resume” but such a “bad track record.”

Evidence 3: The volumes of swallow capital present in the market are gigantic, when compared with the economic magnitudes of many countries, which is why they can cause great havoc.

Reflection 3: Given the magnitude and volatility of these funds, it is expected that the main damage will occur at the entrance and exit doors, where it would be logical to anticipate a certain crowding.

Conclusion 3: Knowing the existence of quite successful methods (Chile), to manage, in a somewhat more orderly manner, the entry and exit of these funds to the country, the fact that nothing similar has been developed in Venezuela, It is another evidence of the government's apathy that punishes us.

Evidence 4: Economic decisions made by long-term investors, both foreign and domestic, take time to execute. For example, the decision to open a factory or to build a hotel or to plant a forest is not made overnight. On the contrary, swallow capitals react in seconds, via purchase and sale orders and electronic transfers. Its economic impact is, therefore, much more immediate and explosive.

Reflection 4: I believe that the most important economic signals for a country emanate from long-term actors, such as the hotelier from Cumaná, the rice farmer from Calabozo and the industrialist from Guacara. However, the urgency and immediacy represented by the pressures of the swallow capitals probably means that the latter manage to attract too much of the attention of the economic authorities.

Conclusion 4: As long as the economy (and politics) obeys, to a greater degree, the young man with gelled hair and suspenders who rules the short term, ignoring long-term signals, the path to economic disaster will remain clear of obstacles

Evidence 5: Venezuela has received an extraordinary amount of resources over the last 25 years, in the short and long term, and they have been of no use. Venezuela, in recent years, has received important long-term funds and they have not been of much use either.

Reflection 5: If we do not know how to manage the resources granted in the long term, what are we doing trying to attract short-term resources?

Conclusion 5: As long as a viable economic development model and a government system that inspires confidence have not been established, the country should not be interested in swallow capital at all, even if it has an efficient gatekeeper to regulate the entry and exit.

Evidence 6: “Credit rating” agencies, despite being used by many diverse actors, such as banking and insurance regulatory entities, with long-term interests, in reality, work mainly for bankers and investors who wish to take liquid positions at short term.

Reflection 6: For someone interested in the long term, for example, a young citizen, the opinions of a “credit rating” agency can be quite irrelevant. Also, know that not every expression of distrust produces bad results.

Consolation 1: Venezuela, in recent years, has not been subject to an invasion of swallow capital as large as it could have been. Imagine the chaos that would occur if some $20 billion of hot money had entered the country and today they were anxiously seeking its way out. The interest rates needed to contain such a herd would have to exceed four digits.

Consolation 2: Do you remember the story of the anguished debtor who finds sleep when with “I can't pay you” he transfers his insomnia to the banker? In our case, something similar happens. When the Venezuelan score goes down, personally, I sleep better, safe in the knowledge that they will not be giving so many resources, on behalf of myself, my daughters and future descendants, to governments that insist on wasting them.

Conclusion 6: The day our governments (during non-electoral times) pay more attention to the opinion of their humble subjects, instead of the opinion of the glamorous international agencies, that day we will have a greater chance of getting out of this situation of ours , which I can only classify and, forgive my English, as a “standard moody and poor”.

https://unsustainabledebtsustainability.blogspot.com/1998/10/about-bad-trust-and-good-distrust.html