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)

Three tweets on the Greek Tragedy

What if Alexis Tsipras and Yanis Varoufakis, while negotiating the debt of Greece with the Troika of the European Commission, the European Central Bank and the IMF, had brought up EU’s “Sovereign Debt Privileges”, and then argued: 

Though our debt is in a currency that de facto is not a domestic printable one, you assigned Greece 0% risk weight. That meant European banks could lend to us against zero capital. You expected our governments to resist the temptations of too easy credit 

http://blogs.reuters.com/hugo-dixon/2013/10/07/bundesbank-right-to-focus-on-doom-loop/

And now you want our children and grandchildren to pay for all the need of bailing out your banks? Have you no shame? 

Shall we take you to court? Shall we inform your constituency about your insane 0% risk weighting of Greece? Or shall we renegotiate?

https://teawithft.blogspot.com/2018/09/in-case-of-greece-eu-violated.html

Here’s the moment it struck me that if Brexit falls apart, there might not be a EU for Britain to remain in.

It’s now twenty years since the Euro was introduced, more in order to strengthen a union than the result of a union. As I wrote in an Op-Ed at that time, it brought on important challenges to its 19 sovereigns. First it meant giving up the escape valve of being able to adjust their currency to their individual economic needs and realities, and second, much less noticed, also by me, was that they would hence be taking on debts in a currency that de facto was not denominated in their own domestic (printable) currency.

To face those challenges required the Eurozone to extend much more the Euro mutuality to other areas, like to monetary and fiscal policies. In that respect there’s no doubt that way to little has been done.

For more than a decade I thought the Eurozone applied Basel Committee’s Basel II standardized credit rating dependent risk weights in order to set the capital requirements for banks, when lending to sovereigns. I never approved of that because I considered those risk weight way too statist, tilting bank-lending way too much in favor of the sovereign and against the citizen... and that should do the Eurozone in. 

But then, by mid 2017, I found out that it was all so much worse. EU authorities, most probably the European Commission, I really do not know who and when, assigned all Eurozone sovereigns a 0% risk weight, even though none of these can print euros on their own.

I could not believe it. That meant that European banks could hold sovereign debt, of for instance Greece, against no capital at all. How could something crazy like that happen? That basically doomed the Euro. What would have happened with USA if it had done the same thing with its 50 states?

How on earth can it now get out of that corner it has been painted into, especially when Europeans sing their national anthems with so much more emotion than EU’s anthem, Beethoven’s Schiller’s “Ode to Joy”

And that’s the moment it struck me that if Brexit falls apart, there might not be a EU for Britain to remain in.

My November 1998 Op-Ed "Burning the bridges in Europe"

PS. When Greece fell into the trap then EU authorities had it sign a Versailles type treaty.

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

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 😩

Was Sofia Goggia singing her national anthem with such fervor just being another Italian populist? NO!

I refer here to Nobel Laureate Michael Spence’s “The Italian Economy’s Moment of Truth” Project Syndicate July 7.

Spence writes:“Italian banks currently holding considerable amounts of government debt would suffer substantial balance-sheet damage.” 

Why is that? Is it perhaps because bank regulators allow banks to hold Italian debt against the least capital, meaning they can leverage it the most, meaning they can earn the highest expected risk adjusted returns on equity on it? Yes!

Then Spence writes: “Moreover, Italy needs to develop the entrepreneurial ecosystems that underpin dynamism and innovation. As matters stand, the financial sector is too closed, and it provides too little funding and support for new ventures.” 

Why is that? Could it be because regulators require banks to for instance hold more capital against loans to entreprenuers than against residential mortgages? Yes!

Spence writes: “Italy has enormous economic potential. But the challenge lies in unlocking it, which will require several things to happen.”

One reason for that is that the option to restore competitiveness by means of devaluing its currency was closed when the Euro was adopted, and the EU authorities have been too busy with other minutia over the last 20 years so as to concentrate on how to solve the immense challenge with creating a union by pushing a common currency instead of a common currency resulting from a union.

The best of the Winter Olympics 2018 for me was seeing Sofia Goggia singing her Italian national anthem with such enthusiasm. But there was not one bit of Europe present in her voice… and that is an indication Europe is not going in a European direction. Was she a populist?

Let’s face it. Americans dream they are American. Few if no Europeans, dream they are Europeans.

E.g. How many Europeans know how to sing the EU anthem “Joy to the World”?

PS. The euro has done nothing to solve the challenges posed by the use of the euro, and in many ways, like what it did to Greece, it has behaved more as a Banana Union.

PS. “We will safeguard your bank system with our risk weighted capital requirements for banks”, as if they the regulators in the Basel Committee really knew what those risks were, is a hubris fed dangerous technocratic besserwisser populism of the worst kind. 

PS. Just in case you are curious, the worst for me at the WO-2018 was to suffer with Egvenia Medvedeva when not winning gold.

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.

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? 

1988, Basel I's risk weighted bank capital requirements that decree 0% risk-weight for sovereigns and 100% entrepreneurs. 

Who should lead the Fed? There’s one initial and essential screening of the candidates.

Fact: Banks are allowed to leverage more with assets considered safe, like loans to sovereigns, the AAArisktocracy and mortgages, than with assets considered risky, like loans to SMEs and entrepreneurs.

So ask the candidates:

Does that mean “the safe” have even more and easier access to bank credit than usual and “the risky” have even less and on more expensive terms access to bank credit than usual?

If the answer is no, disqualify the candidate.

If the answer is yes, then ask: 

Do you think that might dangerously distort the allocation of bank credit to the real economy?

If the answer is no, disqualify the candidate.

If the answer is yes, then ask: 

In terms of what can pose the greatest risk to the bank system, would you agree with Basel II’s risk weights of 20% for what is rated AAA to AA and 150% for what is rated below BB-?

If the answer is yes, disqualify the candidate.

If the answer is no, then ask: 

Do you agree with a 0% risk weighting of sovereigns?

If the answer is yes, the candidate should be classified as an incurable statist and accordingly dismissed.

If the answer is no, you can then proceed with the rest of the tests.

Good luck!

PS. How many of those currently in the Board of Governors of the Federal Reserve System, would pass this test?

That we suffer under the thumb of neoliberalism is mostly a self-serving myth created by statism fans.

In its simplest form neoliberalism represents a belief in that free markets will do better for all, or at least for most, than government with its central planning. 

So many failures have been attributed to neoliberalism and its bad intents that it takes too long to explain them all. In this respect I will here refer briefly to only two aspects that have been sold as neoliberalism, but that in reality are quite far from it, namely financial deregulation and privatizations.

Bank regulations: In 1988 the Basel Committee for Banking Supervision, for the purpose of setting the capital requirements for banks, decided that the risk weight of the Sovereign, meaning the central government was 0%, while that of We the People was 100%. That meant banks would be allowed to leverage more their equity when lending to the public sector than when lending to the private sector; which meant banks could earn higher expected risk adjusted returns on equity when lending to the public sector than when lending to the private sector; which meant banks would lend more to the public sector than to the private sector; which de facto meant that regulators believed the public sector could make better use of bank credit than the private sector. 

That principle is still well and alive today. How it has anything to do with neoliberalism, with financial deregulation and not with financial missregulation, is beyond my comprehension.

For instance those who attribute the financial meltdown of 2007‑8 to neoliberalism must ignore completely the decisive role that bank regulations played in distorting the allocation of credit to the real economy. It suffices to understand the definite role regulations played in the subprime mess and in the excessive lending for instance to Greece. Those regulations basically decreed inequality.

Privatization: Many or perhaps most of the privatizations of public services were allocated, not to those who offered to provide those services in the cheapest and best way, but to those who offered to pay the government the most for the rights. That in all essence signified the government collecting taxes in advance, leaving the citizens to repay these by mean of higher tariffs. How that has anything to do with neoliberalism, is beyond my comprehension.

Why have so many swallowed the myth of neoliberalism? One reason is that the world has too uncritically accepted using the term of crony capitalism, when most of the deviations it suffers are the direct consequence of crony statism.