I asked ChatGPT - Grok: In U.S., what has most caused high house prices, bank regulations or illegal immigration?

I asked ChatGPT:

"In the U.S. what has most caused high house prices; decades of lower bank capital/equity requirements against residential mortgages than against loans to e.g., small businesses, or around 15 million of illegal immigrants?"

ChatGPT answered:

"Good question — it gets at a big and contentious debate. The evidence strongly suggests that the biggest driver of high U.S. house prices is supply-constraints + regulatory and credit/finance conditions, rather than solely the presence of roughly 15 million illegal immigrants. Below I unpack why — and where immigration does play a role (but a much smaller one).

✅ Key structural constraints — supply, regulation, and credit

• Chronic underbuilding + regulatory constraintsThere is a large and growing shortfall in housing supply. According to a recent assessment by Goldman Sachs, the U.S. would need to build “3–4 million additional homes beyond normal construction” to restore affordability. 

Local land-use regulations, zoning laws (exclusionary zoning, restrictions on density, single-family zoning, limits on multi-unit housing), and lengthy permitting processes significantly constrain how many new homes can be built. 

In many desirable metropolitan and coastal areas (e.g., parts of California, New York), housing construction has lagged job and population growth — a classic supply–demand imbalance that pushes up prices. 

As a result, both rents and sale prices have risen steeply as demand kept outpacing supply. 

• Credit supply, interest rates, and mortgage finance policiesEasier access to credit and favorable mortgage conditions (especially pre- and post-2008 through government-supported agencies, looser loan-to-value and collateral requirements, and securitization) boosted demand for housing, which amplified price increases when supply couldn’t keep up. 

Some academic research finds that expansion in mortgage credit contributed strongly to booms (and busts) in local housing markets.

On the regulatory side: proposed increases in capital requirements for banks for residential mortgages (in some versions of the Basel III-based banking rules) may reduce banks’ willingness to lend, especially on high-loan-to-value mortgages, which could dampen supply of credit or alter lending terms — potentially affecting affordability and demand. 

Nonetheless, even before we assign much weight to bank-capital/regulation changes, credit-driven demand + supply constraints appear to explain a large share of price increases. 

In short: decades of underbuilding, restrictive zoning/land-use laws, regulatory limits on what kinds of housing can be built, plus expansions in mortgage lending and low interest rates — together they created a structural imbalance between demand and supply. That structural imbalance has been the main engine of rising house prices in the U.S.

🔎 What about immigration — including undocumented immigrants?Immigration (legal or undocumented) does add demand: more people need housing. Economists recognize this effect in principle — more population generally increases demand.

But empirical estimates suggest that the effect at the national level is modest. For example, a 2007 study cited by analysts found that a 1% increase in a city’s immigrant population raised rents and home values by roughly 1%.

More recent analyses conclude that immigration is not the primary cause of the housing affordability crisis. 

Some arguments advanced by anti-immigration advocates (or political figures) — that millions of illegal immigrants are chiefly responsible for soaring home prices — are repeatedly rated as misleading by fact-checks, because they ignore the central role of supply shortages and regulation.

Also: immigrants contribute significantly to the construction workforce — ironically helping build housing.

Bottom line on immigration: yes, more people (immigrants or not) mean more housing demand, which can put upward pressure on prices — but the magnitude of the effect is relatively small compared to structural supply constraints, regulatory bottlenecks, and mortgage/credit conditions.

I said: Thanks. 

It replied: Glad it helped. If you want to revisit any part—credit effects, zoning, capital requirements, or immigration impacts—just let me know.

I asked Grok

"In the U.S. what has most caused high house prices; decades of lower bank capital/equity requirements against residential mortgages than against loans to e.g., small businesses, or around 15 millions of illegal immigrants?"

Grok answered: 

"Decades of lower bank capital requirements (risk weights) for residential mortgages—typically 50% or less under Basel rules, vs. 100%+ for commercial/small-business loans—have far more strongly driven U.S. house price inflation than immigration.

This policy, in place since the 1980s–1990s, makes mortgage lending artificially cheap and profitable for banks, channeling excessive credit into housing, amplifying demand, and fueling repeated booms (2000s bubble, post-2012 rise, 2020–2022 surge). Studies on capital changes show even modest increases in mortgage capital requirements reduce house prices (e.g., ~2–3% drop per notable tightening), implying the longstanding low requirements have added substantially more over time.

Recent immigration surges (net ~5–8 million additional unauthorized immigrants since 2020, not 15 million new) have added housing demand, mostly to rentals, with estimates of ~1% price/rent increase per 1% population growth at most—and often less, as immigrants also supply construction labor. The major house-price spikes (e.g., +50% from 2019–2022) occurred before the peak immigration wave and were driven by low rates + credit supply, not population.

Primary drivers remain supply restrictions (zoning/NIMBYism) + easy mortgage credit, in which favorable capital treatment plays a key structural role. Immigration is a secondary, recent factor at best."

I said: Thanks!

It replied: You're welcome! Happy to help.

In words of two great Canadian singer songwriters, this is what has, and is happening, to Europe.

After the Basel Committee in 1988 decreed its risk adverse bank regulations, in words of Joni Mitchell’s Yellow Taxi, this is what has happened to Europe.

“Don't it always seem to go

That you don't know what you got 'til it's gone?

They paved paradise and put up a parking lot

Ooh, bop-bop-bop

Ooh, bop-bop-bop (na-na-na-na-na)

They took all the …. and put 'em in a …. museum

And they charged the people a dollar and a half to see them

No, no, no

Don't it always seem to go

That you don't know what you got 'til it's gone?

They paved paradise and put up a parking lot.”

And, if also Leonard Cohen could update his You want it darker, though surely in a more poetic way, it could go something like this:

If you’re the regulator, I'm out of the game

Deciding what banks need, kids will be broken and lame

If thine is the glory, theirs must be the shame

You want it darker

You killed the flame

It's written in regulations

It's not some nonsense claim

Basel Committee told banks

Keep refinancing our safer present

Don’t finance their riskier future

And that’s what our children got

You want it darker

They killed the flame

What has become of Europe (and of you the whole Western world)? Don’t be such a defeatist!

Please free us from imprudent risk-aversion and give us some prudent risk-taking

God make us daring!

USA and Canada beware… all this goes with you too.

 

A Bureaucracy Autocracy has been constructed with stealth

Sir, below I quote from Didi Kuo’s review of Moisés Naím’s “The Revenge of Power”, “How the world has been ‘made safe for autocracy’” Washington Post, April 24.

“Today’s autocrats are savvy, with new stratagems fit for a world upended by technological change. They exploit, and sow, distrust in experts, authorities, the media. They manufacture truth, invent enemies and use legal pretexts to consolidate power.”

The regulators in the Basel Committee for Banking Supervision, launched Basel I in 1988. In order to “save” our banks from that “enemy” of excessive risk-taking, these “savvy” experts concocted risk weighted bank capital/equity requirements; and for which they decreed weights of 0% the government and 100% citizens.

That translated effectively into banks being able to leverage much more their capital/equity with  e.g., Treasuries, than with loans to citizens. That has made it much easier for banks to obtain desired risk-adjusted returns on equity with Treasuries, than with any private sector assets. That de facto implies that bureaucrats know better what to do with credit for which repayment they’re not personally responsible for, than e.g., small businesses and entrepreneurs

You don’t need to take my word on it. Paul A. Volcker, in his 2018 autobiography “Keeping at it” which he penned together with Christine Harper, valiantly confessed: “Assets for which bank capital requirements were nonexistent, were what had most political support: sovereign credits. A simple ‘leverage ratio’ discouraged holdings of low-return government securities”

Add to that central banks’ QEs, which primarily includes the purchase of government debt, and the empowernment of a non-transparent Bureaucracy Autocracy becomes evident. 

If that is not a prime example of “what Naím terms stealthocracy: a way of maintaining the architecture of liberal democracy while gutting accountability” what is?

Sir, as a Venezuelan just like Naím I too heard Hugo Chavez with concern and dislike. But, just like Venezuela’s centralized oil revenue curse has allowed truly bad autocrats to remain entrenched even when the walls are tumbling down, what I now most fear, is that world wide easy-government-money curse. 

Let me also remind you Washington Post, that none of the excessive bank exposures that resulted in major crises, or bubbles that have burst, have ever been built up with assets perceived as risky, always with what was perceived as safe.

I could go on and on, but let me end with two questions:

The Founding Fathers of the Land of the Free and the Home of the Brave, what would they have opined about the Federal Reserve decreeing risk weights of 0% the Federal Government and 100% We the People?

Where would America be today, if its immigrants centuries ago, had been met by this type of risk averse regulations?

PS. My first ever Op-Ed, in the Daily Journal of Caracas, was on the theme of bank regulations. 

PS. An example of how the Bureaucracy Autocracies work.

PS. I have recently enlisted #AI ChatGPT - OpenAI to help me fight the Bureaucracy Autocracy. "What would you opine of risk weighted bank capital requirements with risk weights assigned for political reasons?"

Here's a letter the Washington Post published August 2023. It refers to Paul Volcker’s valiant courageous and honorable confession on what happened 1988. Thanks @PostOpinions for not ignoring it.

My Fourth of July 2019 tweets to the United States of America

This Fourth of July 2019 here are two tweets in which I expressed, to that United States of America that I admire and that I am so grateful to, some very heartfelt concerns.

In 1988 America signed on to the Basel Accord’s risk weighted capital requirements for banks. 

These gave banks huge incentives to finance what was perceived as safe, and to stay away from the “risky”. 

It is so contrary to a Home of the Brave, opening opportunities for all.

And regulators decreed risk weights: 0% sovereign, 100% citizens

That implies bureaucrats know better what to do with credit than entrepreneurs

That has nothing to do with the Land of the Free, much more with a Vladimir Putin’s crony statist Russia

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

PS. Why “grateful”? Had my father, a polish soldier not been rescued by American’s from a German concentration camp April 1945, I would not be.

PS. As one of those millions Venezuelan in exile, I know my country’s future much depends on America’s will to support its freedom.

If I had been elected a first time EU parliamentarian

If I was a newly elected first time European Union parliamentarian, the following is what I would ask in order to leave a clean historical record of my presence there:

Fellow parliamentarians: I have heard rumors that even though all the Eurozone sovereigns take on debt denominated in a currency that de facto is not their own domestic printable one; their debts, for the purpose of the risk weighted bank capital requirements, have been assigned a 0% risk weight by European authorities. Is this true or not?

If true does that 0% risk weight, when compared to a 100% risk weight of us European citizens not translate into a subsidy of the Eurozone sovereigns’ bank borrowings or in fact of all Europe's sovereigns?

If so does that not distort the allocation of bank credit in the sense that the sovereigns might get too much credit and the citizens, like European entrepreneurs, get too little? And if so would that not signify some regulators, behind our backs, have imposed an unabridged statism on our European Union?

And if so, does that not mean that some Eurozone sovereign could run up so much debt they would be seriously tempted to abandon the euro and thereby perhaps endanger our European Union?

Finally, was Greece awarded such a 0% risk weight? If so was this monumental fault by EU authorities taken in consideration when restructuring its debts? And if not, does that not show a basic lack of solidarity with a EU member?

Who should answer these questions? The European Commission?

Oops... it seems that it was the European Parliament through a "Council on prudential requirements for credit institutions and investment firms" that concocted the  idea.

PS. In March 2015 the European Systemic Risk Board (ESRB) published a report on the regulatory treatment of sovereign exposures. In the foreword we read:

"The report argues that, from a macro-prudential point of view, the current regulatory framework may have led to excessive investment by financial institutions in government debt. 

The report recognises the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets. 

I trust that the report will help to foster a discussion which, in my view, is long overdue. Mario Draghi, ESRB Chair"

So Mario Draghi, as president of the European Central Bank since 2011, what have you done about it, or is it your intention to leave that very hot potato to your successor?

PS. In that ESRB report there are references to "domestic" currency but not to the fact that the euro is not really a domestic currency of any of the eurozone sovereigns. 

A brief comment on Joseph E. Stiglitz “The EURO: How a common currency threatens the future of Europe”

Professor Stiglitz correctly describes many of the challenges the Euro poses, most of which were known from get-go twenty years ago, like the problem derived from having fixed exchange rates within the Eurozone.

In the introduction to the paperback edition, Stiglitz also briefly brings forward something that should have been understood but seems to have been much ignored. That is that although the Euro is for most purposes the domestic currency in the Eurozone, it is de facto not a truly domestic currency for any of its sovereigns, since none of these have the right to individually print the Euros it wants or needs. Without that right, the Eurozone’s sovereigns’ debts are all, de facto, denominated in a quasi-foreign currency.

But what the book does not mention, is what came afterwards, I do not know exactly where and when; something that here and there is referred to, in hush voices, as Sovereign Debt Privileges. These translate into that the EU authorities (European Commission?), for the purpose of the risk weighted capital requirements for banks, assigned all Eurozone nations an insane 0% risk weight. 

That distortion in favor of Eurozone’s sovereign’s accesses to bank credit has impeded the markets from sending the correct market signals with respect to the interest rates for each sovereign.

One of the consequences of this has been the tragedy of Greece. Especially since Greece was then forced up to pay up basically on its own for this EU mistake, so as to bail out German, French and other Eurozone banks. What a Banana Union!

As for Professors Stiglitz opinions on Brexit I might resume those I my own words as “If there's a Remain there might not be a EU in which to remain”, something that would be very sad as EU was, and still can be, a very beautiful dream.

But let me be clear. I do not hold the EU authorities as solely responsible for the consequences of their 0% risk weighing of the Eurozone Sovereigns. Already in 2011, in a post titled “Who did the Eurozone in?” I argued that the extraordinary low risk weights that the Basel Committee assigned to sovereign debt when compared to what it assigned to the private sectors would end in tears. (And that goes not only for the Eurozone)

The statist Basel Accord should be anathema to the American Constitution.

Charles Krauthammer once wrote the American Constitution “stands for the pillars that define a limited government with enumerated powers, whose mission is to preserve liberty and individual rights”, “The enduring miracle of the American Constitution”, Washington Post, November 30.

In 1988, one year before the Berlin wall fell and so many thought the world had freed itself from communism, America, and much of the developed world, signed up on the Basel Accord. That accord, for the purpose of its risk weighted capital requirements for banks, awarded the sovereign a 0% risk weight, while imposing one of 100% on unrated citizens.

If Krauthammer is right when he wrote of a reverence for the Constitution “so deeply ingrained that we don’t even see it; we just think it’s in the air that we breathe”, I cannot understand the American silence on what clearly is a statist concoction; which I believe goes against everything America and its Constitution stands for.

That seriously distorted the allocation of bank credit in favor of governments and has now painted America into a very dangerous corner; in 1988 America’s public debt was about $2.6 trillions, now it owes around $21.7 trillions and still has a 0% risk weight.

@PerKurowski

PD. Here is what AI, in 2025, thought about what the Founding Fathers would opine.

Jeff Fairburn’s £75m bonus is nothing when compared to the real problem with house prices.

Aditya Chakrabortty holds that “Jeff Fairburn’s £75m bonus has sharpened focus on the vast windfalls generated by help to buy” “Let’s stop lining housebuilders’ pockets and tax them instead” The Guardian, November 9, 2018.

No, it clearly has not! By focusing on that bonus, which naturally stirs up some envy into all of us, he misses the real issue, namely how much helping houses to be affordable for some, makes these even more unaffordable to others.

So first, let us all shake off that Jeff Fairburn’s £75m bonus. To begin with just take it as if life had dealt him a lottery jackpot. He has most certainly paid much more taxes on it than the taxes that would be paid had that £75m bonus been shared out equally among us all. And I would bet that more than 99% of what purchase power he had left over, has already been returned to the real economy by him buying assets or services.

That “the five biggest British housebuilders together paid out £4.4bn in dividends to shareholders between 2014 (the first full year of help to buy) and 2017” is totally irrelevant when compared to the magnitude of the real problem with houses.

That problem has to do with how much house prices have been inflated by this scheme and so many other distortions; especially like regulations that allow banks to hold much less capital when financing the purchase of houses than when lending to entrepreneurs… those who could be the ones who create the jobs so that house buyers will be able to afford to pay their mortgages and utilities.

Aditya Chakrabortty laments “Without that money from you and me, Persimmon would simply not have made that many sales, nor made that much profit– and its outgoing boss probably wouldn’t have got such a large bonus.” He should look at himself first.

Does Aditya Chakrabortty own a house? Then he should reflect on how much his house has gone up in value because of all the political kindness awarded house buyers. Should he not pay high taxes on that? House builders at least built. What have house owners done to enrich themselves so?

Does Aditya Chakrabortty not own a house? Then he should reflect on how much all the political kindness awarded house buyers has made houses even more unaffordable to him.

Houses are no longer homes; as a consequence of all regulatory and political kindness these have become investments assets too. The day too many house-owners will want to cash in their investment, for instance to pay some retirement costs… will the buyers be there for them? 

Well if we prohibit all political kindness awarded house buyers… as we in fact should so as not to blow the bubble larger, then many if the current buyers will definitely not be there... but then those that do not own houses may begin to find these affordable.

It all makes me remember Alan Price’s “Oh my, my, my, my, my, my, my, it makes you wanna cry. This is the house that Jack built, baby, and it reaches up into the sky”

Five tweets and four PS: When shares and houses will want or need to transition from here to there, what will happen?

Huge QE, large fiscal deficits, and generous bank credit pushed on by very low capital requirements, injected huge amounts of liquidity that, among others, caused the price of shares, and the price of houses that morphed from homes into investment assets, to increase immensely.

Soon many of the elderly owners of shares and houses, will want to reconvert these assets again into main-street purchase capacity, whether voluntarily, in order to cover for their retirement costs, or involuntary, by having these assets becoming part of an inheritance.

The sale of shares and houses will then face: An extremely indebted economy that includes huge unfunded social obligations. Gig jobs, robots that tend to hold down wages, and pension funds and insurance companies also needing to sell assets in order to meet their own commitments.

How is all that going to play out? Since there are no possibilities of reenacting Troubled Asset Relief Program (TARP), or placing all shares and houses on central bank’s balances, it has me very troubled and finding very little that could bring me, a grandfather, some relief.

Is someone somewhere preparing financial or economic counter measures that could alleviate the problems brewing in the horizon? I really doubt it! As Einstein said, “We can't solve problems by using the same kind of thinking we used when we created them.”

PS. All this could be further much complicated by social tensions caused by lack of employment. Therefore I would ignore all the redistribution profiteers’ natural objections, and immediately enact an Unconditional Universal Basic Income. Even $100 per month would do for a start.

PS. That UBI could be partially funded by a high tax on carbon emissions. That would allow us to use market signaling more, in order to avoid that whatever little resources we might have available for fighting climate change, are captured by green-profiteers.

PS. Bank regulators messed it up for us. Their risk-weighted capital requirements only guarantee banks building up especially large exposures, to what’s perceived as especially safe, against especially little capital, dooming bank systems to especially large crises

PS. If our descendants are to stand a chance they must understand that risk-taking is the oxygen of any development, and so they must be wary of any loony runaway risk aversion, imposed by expert besserwisser nannies. God make us daring!

Bank regulators behave like the scarer employed at the energy-producing factory Monsters, Inc.

The idea of requiring banks to hold less capital (equity) against what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential houses, than against what is perceived as risky, like SMEs and entrepreneurs, is absolutely cuckoo.

That means that when banks try to maximize their risk adjusted return on equity they can multiply (leverage) many times more the perceived net risk adjusted margins received from “the safe” than those received from “the risky”. As a result clearly, sooner or later, the safe are going to get too much bank credit (causing financial instability) and the risky have, immediately, less access to it (causing a weakening of the real economy). 

Anyone who can as regulators did in Basel II, assign a 20% risk weight to what is AAA rated, and to which therefore dangerously excessive exposures could be created, and 150% to what is made so innocuous to our banking systems by being rated below BB-, always reminds me of those in Monsters, Inc. who run scared of the children. I wish they stopped finding energy in the screams of SMEs and start using their laughter instead.

“We need a people’s Fed”. Yes, we sure do! Assigning 0% risk weight to the sovereign and 100% to any unrated citizen is pure statist ideology driven discrimination in favor of government bureaucrats and against the people. But perhaps the activists depicted are not into that kind of arguments. 

PS. Those in Monsters Inc. finally figured it out. Our bank regulators in the Basel Committee and the Financial Stability Board have yet to do so, even 10 years after that 2008 crisis, which was caused exclusively by excessive exposures to what was perceived, decreed of concocted as safe, like AAA rated securities and loans to sovereigns like Greece 😩

Trade wars will mean new tariffs

There is another tariff war that is being dangerously ignored 

The July 6 editorial "A splendid little tariff war?" rightly held that "tariffs create all sort of inefficiencies, unintended consequences and uncertainty."

The risk-weighted capital requirements for banks also translate de facto into subsidies and tariffs, which have resulted in a too much-ignored allocation of bank credit war. 

One consequence is that those perceived as risky, such as entrepreneurs, have their access to bank credit made more difficult than usual, and our economy suffers. Another is that by promoting excessive exposures to what is especially dangerous, because it is perceived as safe, against especially little capital, guarantees that when a bank crisis results, it will be especially bad. 

In terms of Mark Twain's supposed saying, these regulations have bankers lending out the umbrella faster than usual when the sun shines and wanting it back faster than usual when it looks like it is going to rain.

Letter published in the Washington Post

A 2019 letter on this issue to the Executive Directors and Staff of the International Monetary Fund.

Dialoguing in 2025 with ChatGPT and Grok about trade tariffs vs. bank regulation tariffs.

World Bank, more than a “Knowledge” bank, a “Besserwisser” bank, be the “Wisdom” bank I know you could be; or, if that sounds too haughty, at least aspire to be “The Common Sense” bank.

A “Knowledge” bank might think that assets perceived as risky could be risky for banks. A “Wisdom” bank understands that what could be especially risky for banks, and for bank systems, is what is perceived as safe.

A “Knowledge” bank might think that it is great for banks to avoid taking risks.

A “Wisdom” bank knows that the most important function for banks is to take intelligent risks on behalf of society.

A “Knowledge” bank might agree with the Basel Committee’s bank capital requirements based on perceived risks.

A “Wisdom” bank would think much more in terms of not distorting credit allocation, and, if that’s not possible, in terms of capital requirements for banks with a purpose, like on perceived chances of fostering human and natural capital wealth

A “Knowledge” bank, if it has to distort the allocation of bank credit, might agree with bank capital requirements against sovereigns based on credit ratings.

A “Wisdom” bank, in such a case, would much more prefer to base the bank capital requirements on a good governance index.

A “Knowledge” bank might say: “We know it all”. A “Wisdom” bank, would understand “We know Jack shit!”

Or, if aspiring to becoming the “Wisdom bank” sounds too haughty, the World Bank it should at least aspire to be “The Common Sense” bank.

"God make us daring!"

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

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. How far has the IMF has progressed researching the theme of this regulatory subsidy?

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.