Thursday, November 20, 2008

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.

Sunday, November 16, 2008

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.

Thursday, October 16, 2008

We need to tax intellectual property income with a higher rate

The dollar bills of the United States, are marked with the abbreviated prayer of "In God We Trust"

A more complete version of it would be "We trust in God to keep politicians from printing more dollars than what the economy can back, or, if not, to give the U.S. taxpayer the willingness and the ability to pay the taxes it takes". A similar prayer applies equally to all other countries.

Now even though the private sector will bear most of the initial losses of the financial crisis, this one will end up being extremely costly to the tax authorities and certainly in many cases, exceed their current fiscal capacity. In this respect some of its costs should be covered by higher taxes, since if not these will be paid through inflation, the tax on the poor.

Society has for many decades not analyzed any new taxing schemes which could better fit the new global realities and therefore interfere as little as possible with the recovery of the economy. It may be appropriate to start thinking about that. Any new tax proposal though must be legitimized on the basis of justice and rationality. In this regard I am circulating some ideas for discussion and the following is one of these.

The tax on the profits obtained from the monopolies created by intellectual property rights.

Most or perhaps all intellectual property rights are awarded to whoever runs the last leg of a relay that has been run with ingenuity, creativity and strenuous efforts, by generations of humans. Previous runners allow the last one to cross the finish line victoriously, to raise a finished idea as his, although he did not necessarily initiate it.

The particularity of this relay is that anyone who expects to be running as the last leg cannot be completely sure of what it entails. Sometimes running it can be easy, and sometimes it may require millions in equipment and others to fund the efforts. Society, in order to encourage ingenuity, creativity and the effort required of all needed to make the world progress, just decided to award the runner crossing the finish line, the trophy of an intellectual property right.

The problematic part of this social arrangement is that all intellectual property rights create a right to a monopoly and as is exercised with little or no regulation, restriction or supervision, meaning it can be subject to exploitation.

Because all intellectual property rights granted by the society imposes an obligation on it to defend that right, in many ways, which costs a lot, the question remains whether it would not have been better to use those resources for other purposes, such as funding others to run the last leg on behalf of the society.

I cannot find any logic or justice charge to tax a company who has been granted a monopoly intellectual property right, for something to which previous generations have contributed and in which defense Society needs to invest resources, with the same tax rate that applies to a company that competes in the market naked without any kind of protection.

And so I proposed to study the gains generated by the exploitation of intellectual property rights to pay a tax on additional profits, say 20 %. These revenues can be used to reimburse the company for the costs of defending the intellectual property and to help fund those other runners in relays of humanity aimed at developing essential goods that we can serve everyone.

Wednesday, October 15, 2008


Civil Society can help turn millions into billions.

Financial regulators turn billions into trillions.

Let us keep our eyes on the gorilla!

Tuesday, October 14, 2008

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.”

Saturday, October 11, 2008

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.

Thursday, October 09, 2008

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”

Wednesday, October 08, 2008

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.

Friday, August 29, 2008

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.

Wednesday, August 20, 2008

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.

Tuesday, August 19, 2008

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.

Wednesday, July 23, 2008

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

Monday, April 28, 2008

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!

Thursday, April 17, 2008

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!

Wednesday, April 16, 2008

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 of a too high priority 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.

Tuesday, April 15, 2008

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.

Friday, April 11, 2008

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.

Wednesday, January 16, 2008

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.

Saturday, January 12, 2008

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.