Thursday, December 28, 2017

Bank regulators’ statist 0% risk weight of sovereign, turn governments into credit spoiled filthy-rich brats that will end up defaulting

If banks need to hold much less capital when lending to the sovereign than when lending to anyone else; and thereby makes it easier for the sovereign to offer banks an attractive risk adjusted return, banks will lend and governments will borrow, way too much. It is doomed to end badly.

That is what the 0% risk weight of sovereign when setting the capital requirements does. It is a shameless and dangerous regulatory subsidy of government debt which statist regulators justify based on “sovereigns can always print money”, which as we all know is precisely one of the major risks with sovereigns.

And too many experts, most, are not even aware of that regulatory subsidy, and often refer to government debt setting the risk-free rate, as if nothing had happened.

For instance, way to often we read a reputable financial commentator opining that the sovereign should take advantage of the very low rates in order to take on some needed infrastructure projects that will also provide jobs while they last. No consideration at all is given to the fact that government debt, if it does not help generate the economic growth required for its repayment is a de facto tax on future generations. Those who seem to be most in need of tax-cuts are the unborn. Why not think of them too President Trump?

What would happen if we want to retire our deposits in a bank that is overextended in loans to an overextended sovereign? Have the sovereign print money? Like any Venezuelan central bank?

This 0% risk weighting started in 1988 with the Basel Accord. During the almost 600 years of previous banking there was nothing of that sort of distortion. Imagine what financier Templar Grand Master Jacques de Molay, burned in 1307 by Phillip IV, would have to say about that 0% risk-weight. 

But what to we do now? If we imposed on banks the same capital requirements for lending to the sovereign than when lending to the citizen, which is how it should be in order for banks to allocate credit efficiently, that would create so large new capital requirements it could bring the whole ordinary bank credit function to a halt.

Let us suppose we want banks to hold 10% in capital against all assets. One alternative would be to lower the current capital requirement for banks to each banks’ current average capital, and let it thereafter build up little by little… with no dividends for quite sometime... or allowing banks to hold on to whatever current 0% risk weighted sovereign debt they have against no capital, but strictly imposing the new capital requirements on any new purchases of it.

Another tool that (thinking of my grandchildren) could be needed and effective is a haircut on all bank depositors, by forcing them receive some negotiable non-redeemable bank shares in lieu of money. (Perhaps those shares could even turn out to be a good investment for pension funds)

What Kurowski? Have you gone mad? No friends, just tell me how we otherwise stop governments, egged on by so many redistribution profiteers, from taking on subsidized debt?

PS. Be sure of it, currently Financial Communism reigns

PS. The other sector that is being subsidized by low risk weights is that of residential mortgages. That will likewise signify we end up with plenty of houses for our children to live in the basements, but too few jobs for them to be able to buy their own upstairs.

PS. In 1988 when statist regulators assigned it a 0% risk weight, the US debt was $2.6 trillion. At end of 2017 it was US$20.2 trillion, and still 0% risk weighted. If it keeps on being 0% risk weighted, it is doomed to become 100% risky, just like what happened to Greece

PS. What to do? The regulators painted us all into a corner. The 0% risk weight of sovereigns will continue to dangerously doom the public debt safe-havens to become overpopulated by banks holding especially little capital. But any increase of that weight, will scare the shit out of markets.

PS. The only way to solve the 0% sovereign risk weight conundrum that I see, is to increase the leverage ratio applicable to all assets, until that level where the risk weighted capital requirement totally loses its significance.

PS. The same central bank technocrats who target a 2% inflation rate, which means that in 10 years our money will be worth about 22% less, are the ones who assign sovereigns a 0% risk weight. Why do we allow them to treat us with such statist contempt?

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.

Friday, December 22, 2017

Before going after the “filthy-rich”, it behooves us all to consider how they got their wealth and what they have done with it.

The plutocrats can have obtained their wealth in many forms ranging from highly licit and commendable ways that have even enriched many others, to odiously having used criminal means leaving many impoverished in their wake. But, once that wealth exists, what can the wealthy do with it?

They can invest their wealth in bonds and shares, which mean these assets, if well invested, will be productive.

They can freeze their purchasing power, by a sort of voluntary tax, on walls or in storage rooms, like for instance the $450 million Leonardo da Vinci “Salvator Mundi” (What those who got the $450 million fresh purchase power do with it, is what then becomes relevant to the economy) 

They can spend their wealth on things that no normal human being could spend on, which helps to create jobs than would otherwise not exist.

They can put some cash, on which they earn 0%, under the mattress... a couple of $100 bills?

They can engage in philanthropy, hopefully efficiently in worthy causes, otherwise that's a loss.

They can use their wealth to manipulate and exert undue influence.

That should primarily make us go after that wealth that has been obtained through illicit or immoral means; and that wealth that is used to manipulate and obtain more influence than what its owner should rightly have; and keep an eye out for useless and even bad philanthropy.

I argue all this because, when redistribution profiteers try to increase their franchise value by instigating envy and hate, it behooves the rest of us to make a clear distinction between the good and the bad among the astronomically wealthy; and to much better understand what has already been "redistributed" by the wealthy themselves, so as to avoid unexpected consequences.

What is absolutely certain though is that any redistribution of wealth will yield only a minuscule fraction of the benefits so loudly promised.

PS. There are though many market inefficiencies that allow wealth to be accumulated in legal and moral ways but that should anyhow be combated. This includes monopolies or excessive rent extraction from intellectual property rights.

Saturday, December 09, 2017

How can we, the 99.99%, in order avoid suffering the tragic consequences of any awful leveling events, coexist in a friendly and mutually beneficial way with the extremely wealthy 0.01%?

Edoardo Campanella reviews five books debating “the growing wealth gap between a narrow upper class and the rest of the human population” that which he argues may be the greatest economic challenge of our time. “Inequality and the Coming Storm” Project Syndicate, December 8. 

The books reviewed are: The Great Leveler, by Stanford University historian Walter Scheidel; Global Inequality, by CUNY economist Branko Milanovic; The Vanishing Middle Class, by MIT economist Peter Temin; The Broken Ladder, by University of North Carolina at Chapel Hill psychologist Keith Payne; and Plutocrats, by the former journalist and current Canadian Minister of Foreign Affairs Chrystia Freeland.

There are many origins of that wealth that feeds inequality, some abominable and odious, like crime and corruption, other, like Chrystia Freeland writes, “built their fortunes through hard work, talent, and discipline. But, once that wealth has been created, it can be destroyed by what Walter Scheidel calls the “Four Horsemen of Leveling”, exemplified by “the twentieth-century world wars, the Russian and Chinese Revolutions, the fall of the Roman Empire, and the Black Death, respectively. 

Surely the consequences of such horrendous levelers, especially for the much more numerous poor, cannot justify us ever wanting to get rid of inequalities that way… that is except if we have a need of a schadenfreude with masochistic characteristics. 

When Scheidel argues, “all societies eventually reach the level of inequality they can tolerate. Once this pain threshold is breached… Only carnage, chaos, and destruction can restore fairness in the system… extreme inequality yields only to extreme equalizers” our first and only concern should be, how on earth can we learn to live well and prosper in a world of runaway inequalities? 

Campanella, seemingly agreeing on that goal writes: “What can be done? Many commentators recommend improving the availability and quality of public education. Others have proposed more effective ways to tax wealth, such as a global tax on capital income, higher marginal tax rates, more aggressive estate taxes, or even a tax on robots. And still others are calling for a universal basic income (UBI).”

But Campanella is no optimist… “none of these will be a panacea. Educational policies take years to gain traction; taxing the global super-rich would require a level of international cooperation that does not exist today; and a UBI is simply unaffordable for most – if not all – governments.”

I instead, hopefully since I see no other remedy, think we do have a chance to coexist in a friendly and mutually beneficially manner with the unbelievable wealthy. But for that to happen there are some requisites:

1. We appreciate what inequality might produce. For instance when Campanella writes “Most of the great temples, royal palaces, pyramids, castles, and other monuments of history are the lasting evidence of past wealth disparities”, we should immediately ask ourselves whether those monuments would have existed at all without rampant inequality and, if our answer is no, would the world have been a better world for all of us? 

In this respect I had a wake up experience a couple of years ago when reflecting on a beautiful richly adorned but totally useless shield at the Museum of Louvre, it dawned upon me that most of it would not exist were it not for immense inequality. I suspect that Thomas Piketty, as a Frenchman, would not want to have sacrificed Louvre either, in the name of some unknown equality…we know the inequality we have.

2. We begin to understand that much of the wealth that exists cannot just be redistributed without the possibility of serious unexpected consequences. For instance what harm can it do that one person has now decided to freeze on a wall, with a sort of voluntary tax, US$450 million of his main-street purchase capacity, in Leonardo da Vinci’s Salvator Mundi? If anything we should go after those who got the US$450 million and see what they do with it… and if they pay their taxes. Those US$450 million on the wall should also help to raise expectations about the value of art, which might lead to some thousands of painters getting a dollar or more for their paintings, something which though it might not decrease inequality much, would in general be very good. (Disclosure, my daughter is an art consultant J)

3. We fully comprehend that all that wealth that, if it were ours, would surely help us to solve many of our daily problems, does not really guarantee its current owners one iota more of happiness.

4. We fight against all that hinders opportunities, like the risk weighted capital requirements for banks with which regulators have basically decreed inequality. In the same vein we need to combat all criminal or unproductive accumulation of wealth, like that obtained by means of corruption or the excessive exploitation of monopoly elements. 

5. And finally (especially as a Venezuelan) we have to fight tooth and nail against all the redistribution profiteers, those who instigate envy and class hatred only in order become themselves the neo-Plutocrats.

PS. And though for much more than reducing inequality, I do believe in a Universal Basic Income.

Wednesday, December 06, 2017

More important than affordable houses for the young, is for them to afford houses.

A letter sent to The Globe and Mail (not published)

The Inter-American Commission of Human Rights (IACHR) has joined UN Rapporteur in recognizing Canadian Human Rights-Based Approach to Housing. When it refers to the creation of safe and affordable housing during the next 10 years for the Canadian population most in need, such as women and children fleeing family violence, seniors, persons with disabilities, those dealing with mental health and addiction issues and veterans, I cannot but concur.

But, it also makes reference to “young adults” and, in this, as a grandfather of two Canadian girls, I must raise my hand to argue that much more important than allowing the young adults affordable housing, is allowing them to afford houses.

Currently, because banks are allowed to leverage more with “safe” residential mortgages than with loans to the “risky” entrepreneurs who stand a better chance to create the future jobs our young need; and banks therefore earn higher risk adjusted returns on equity with mortgages than with loans to entrepreneurs, Canada, like all countries using the Basel Committee’s risk weighted capital requirements for banks, has put the horse before the cart.

PS. Not sent to The Globe and Mail: What would the price of a house be if there was no financing available to purchase these? Of their current price how much is represented by the intrinsic value of the house, and how much is a reflection of all one-way-or-another subsidized financing allocated to that sector? The sad truth is that our society has ended up financing the financing of houses. When all that low risk weighted mortgaging comes home to roost in a subprime unproductive economy, it will be hellish

PS. Chinese money: What’s the problem with Chinese freezing some of their wealth in Canadian real estate? What’s important is what those selling that real estate do with the money. Or not?

Research project: How much in the current house prices can be attributed to the market having priced in all preferential treatments the society has awarded the financing of houses… like the low risk weights in the risk weighted capital requirements for banks?


Saturday, December 02, 2017

Fiscal waste's decades out

Some want tax cuts.
Some wants tax increases
But no one want tax spending cuts
So its the fiscal waste's decades out

But why worry when it is so easy to finance it with QEs, low interest rates and regulatory subsidies.

Regulatory subsidies?