Many of our young will be without jobs, and will have to live in the basement of their parent’s houses, as a direct consequence of abominable bank regulations

Fact: The financing of house purchase is usually, with reason, perceived by bankers as much safer than financing entrepreneurs.

Fact: That means that, on their own, unregulated, banks would be expected to finance the purchase of houses more, and at lower risk adjusted interest rates, than financing entrepreneurs. 

Fact: But then bank regulators in 1988 doubled down on the same ex ante perceived risk and introduced risk weighted capital requirements. 

Fact: In those capital requirements (2004, Basel II) regulators assigned a much lower risk weight to the financing of houses (35%) than to the financing of entrepreneurs (100%).

This means regulators allow banks to hold less capital when financing the purchase of houses than when financing entrepreneurs. 

This means banks can now leverage their equity more when financing the purchase of houses than when financing entrepreneurs. 

This means banks can now obtain higher expected risk adjusted returns on equity when financing the purchase of houses than when financing entrepreneurs. 

This means that banks will even more prefer financing the purchase of houses, at even lower interest rates, than the financing of entrepreneurs.

This means easier, regulatory subsidized, access to house financing, causing higher house prices. How much of the easier  financing conditions when purchasing houses do we now have to finance when financing a house purchase?

This means a lesser, taxed by regulations, access to credit for entrepreneurs, causing less job creation and a slower growing real economy.

So, compared to what would be the case in the absence of these risk-weighted regulations this means:

For the young: Fewer possibilities of jobs and of buying their own houses. 

For house owners: They are sitting on assets that at current real valuations will not find buyers in the future.

For the aging: Lesser possibilities of taking care of their future needs.

For social peace: The young might revolt and shout: “Parents we’ve been cheated out of our future by crazy bank regulators, and you said nothing! So now you move down to the basements and we move upstairs!”

PS. Those more interested in providing our young affordable housing than in helping our young to afford the houses, which is of course not the same thing, are as I see it just some other vulgar redistribution profiteers.

PS. Here a brief aide memoire on the major mistakes with the risk weighted capital requirements

Oxfam, how do you redistribute wealth already created, without risking making the poor poorer?

Felix Salmon, when commenting on Oxfam’s “Reward work, not wealth: To end the inequality crisis, we must build an economy for ordinary working people, not the rich and powerful” writes: 

“The world’s billionaires – the richest 2,000 people on the planet – saw their wealth increase by a staggering $762 billion in just one year. That’s an average of $381 million apiece. If those billionaires had simply been content with staying at their 2016 wealth, and had given their one-year gains to the world’s poorest people instead, then extreme poverty would have been eradicated. Hell, they could have eradicated extreme poverty, at least in theory, by giving up just one seventh of their annual gains.”

That particular paragraph is spoken like a true redistribution profiteer 😞

First: Where do those “one-year gains” originate? If from criminal corruption, if from skewed central banks stimuli, if from exploiting monopoly and similar forces, then a reduction in that wealth increase would be absolutely justified and good… but, if that wealth increase came from true wealth creation, or even from heritage, then a reduction of it could have very negative consequences for all, especially for the poor.

Second: If that wealth has already been created and is consequently represented by assets, how does one liquidate those assets so as not to affect the value of those assets, or in other ways put markets at risk? One of those 2.000 billionaires is probably he who bought Leonardo da Vinci’s “Salvator Mundi” for $450 million. He, de facto, like with a sort of voluntary tax, froze $450 million of purchasing power on a wall, or in a safe box. How on earth does one go about to reconvert that into $450 million of new purchase power that could be handed over to the poor?

The Oxfam report contains many correct statements. I totally agree with that wealth should not be created by criminal and unfair behavior, or derived from crony statist relations; and I also agree with that wealth should not be used to abusively increase the influence of the wealthy in our societies.

But when the report states “To end extreme poverty, we must also end extreme wealth” I disagree. First because whether one likes it or not, wealth, as it is invested in assets, has de facto already been redistributed… like in the previous case to those who received the $450 million paid for the “Salvator Mundi”… to those who sell a luxury yacht… to those who sell handmade shoes in Milan… to governments by buying public debt… to markets by buying shares.

On the report Jeffrey Sachs comments: “Sometimes the super-rich call out Oxfam and others for ‘stoking class warfare’ but the truth is that in many societies, including my own, the United States, many of the super- rich have in effect declared war on the poor.”

That sounds precisely like what Chavez preached and now Maduro does in my Venezuela… and look where that has taken our poor country… with asset values and salaries totally destroyed over some very few years… a whole generation of Venezuelans growing up severely malnourished… and the Bolivarian revolutionaries blaming it all on the war declared on them by The Empire. 

Oxfam, a multinational confederation of NGOs, having issued this report, has now a moral obligation of explaining, once wealth has been created, how it can be redistributed without running the risks of making the poorest poorer. And, if it can’t, it should stop creating false expectations.

PS. Legend holds it that when Otelo Saraiva de Carvalho, chief strategist of the 1974’s Carnation Revolution in Lisbon, told Sweden’s Olof Palme: “In Portugal we want to get rid of the rich”, Palme replied, “how curious, in Sweden we only aspire to get rid of the poor”

PS. Here are some tweets on this thorny issue.

Expropriate it! 

About Zamorano and the use of country systems

I posted this because today World Economic Forum @wef posted a tweet that said "Denmark is building a school where students have to grow their own food". I already saw such a school, way back, in Honduras, in Zamorano.

This is a copy of an informal memo sent to my colleagues Executive Directors at the World Bank in 2004, as extracted from my Voice and Noise of 2006.

About Zamorano and the use of country systems

Dear colleagues,

Traveling in Honduras recently, I heard on the radio the old rock band Enanitos Verdes singing about having to run the risk of getting up, in order to keep on falling, and it reminded me of our recent discussions about “use-of-country-systems” where I gave you my mumbo jumbo about having to let them go, since this is the only way they could learn how to ride a bike. 

I was on my way to visit the agricultural school Zamorano, cajoled (with no major effort needed) by one of its graduates—a friend of ours, Jorge Wong, and little did I know I was heading into true learning-how-to-bike land. The motto of this most amazing school is “learning while doing” and … Boy, do they! Boy, do they learn!

In Zamorano, kids have a school year of 11 months and are rigorously awakened every morning at 5 am—hellish but I tell you that it has been a long time since I’ve seen such a group of enthusiastic, happy, and feeling-good-about-the-future young faces. There are about eight hundred boarding students, of whom more than two hundred are girls. They come from many Latin American countries, from all backgrounds, and any differences are neutralized with education, companionship, and uniforms. 

Along with their formal academic classroom studies, the kids, from seventeen to twenty-three, are taught about every imaginable (and also some you-do-not-want-to-imagine) agricultural and farm chore there is, by being handled full responsibility for doing them. They grow crops, milk cows and in the industrial installations where they produce cheeses, juices, marmalades, sausages, and much more that they sell in Honduran supermarkets, the managers are the students from senior grades and the workers their younger friends. 

And Zamorano goes way beyond teaching knowledge. When I heard some kids explain to me about the biologic pesticides they develop and market all over Central America, could it be to make it the “Green Subcontinent”? It became clear that besides algebra, they must have gotten lectures on confidence building, communication skills, and character formation too.

Although I was told that in the dry season the landscape changes somewhat, El Zamorano as I saw it lay snuggled in a beautiful valley, where it has about 10,000 acres of land and great and functional facilities. This Zamorano seed effort is more than ready for some heavy-duty scaling-up, and they have already started doing so with some interesting and substantial extension programs, reaching out to their neighboring communities. Envying their tremendous educational expertise, I am already on my knees, begging them to branch out into my favorite Central American growth program—you bet, those who know me: educating doctors specialized in geriatric ailments and bilingual nurses, certified by schools and health authorities of developed nations.

In the last couple of weeks we have been reminded of some of Ronald Reagan’s “one-liners” (slogans), among them, “trust but verify.” It is clear that we face serious challenges when monitoring or verifying the results of our projects, but, frankly, after having been in Zamorano, I am convinced that it is exactly in the trusting department where we really are in the backwaters. We need not worry, though. Zamorano was founded three years before the World Bank, and so we still have a chance to catch up. 

Back in D.C., on my radio, Joan Manuel Serrat was singing about Africa—something about the world not letting it go, yet not holding onto it.

Here is a fact Washington should consider before, inhumanly, sending Salvadorans packing, after using them for so long.

In my book Voice and Noise of 2006 I wrote the following:

Snowing in Washington

Yes, it had snowed a little, but never would I have imagined when I arrived for an early-morning conference at the World Bank that I would find the meeting had been suspended because of “inclement weather.” Later I came to understand. Just a minimum amount of snow creates total havoc in Washington. The snow covers the streets for days and except for those few corners that are shoveled clean by some tropical Salvadoran saviors living up to their name, it will have to melt away either through warmth or tons of salt. The schools also shut down for any little flurry and although the news of this is received with great joy by all children, my daughter first among them, but nonetheless of course, not braving it will only make it harder for Washingtonians to conquer their weakness through Darwinian evolution. Indeed, Washington is a great and beautiful city and although it is the capital of the world’s mightiest nation it has also its Achilles’ heel. It could be completely shut down with just a couple of strategically located snowmakers.