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 😩

Deciphering my tweet

My tweet: "A much worse debt crisis awaits us, perhaps the sooner the better, caused by having kicked the 2008 crisis can down the road, while keeping serious miss-regulation of banks. When it hits, an Unconditional Universal Basic Income, however small, might be society’s only survival tool." 

Just looking at the huge debts of all sectors, in all nations; sovereigns, corporations, house financing, student debt, credit card debt and unfunded social liabilities; that which among other converted homes into also being dangerous investment assets; and pushed the consumer and government demand that should be there to prop up the future economy to prop up the current, there's no doubt that “A much worse debt crisis awaits us.”

Since it was our generation that trusted populist besserwisser technocrats to know what they were doing, for instance when they told us “We will make your bank systems safer with our risk weighted capital requirements because we know what the risks are”, this is really our generation’s made crisis. In this respect, because we should not leave that crisis to our grandchildren to take care of, and also because we do not want that debt to grow even more, that’s why the “perhaps the sooner the better”. 

QEs or asset purchase program, ultralow interest rates and many continues fiscal deficits clearly explains the “caused by having kicked the 2008 crisis can down the road” (forward and upwards).

The risk weighted capital requirements for banks in Basel II assigned a 0% risk weight to sovereigns, a 100% risk weights to the citizens who make the sovereign strong; and allowed banks to leverage a mindboggling 62.5 times their capital with private sector assets rated AAA by human fallible credit rating agencies. That caused the crisis. As much of those distortions are still well and alive, that  should more than suffice to explain the “while keeping serious miss-regulation of banks”.

“When it hits”, that’s when all polarization and redistribution profiteers of the world, like Venezuela’s Chavez and Maduro, will be out in masses on the street trying to capitalize on the mayhem, in order to increase the value of their franchises.

And that’s precisely when and why “an Unconditional Universal Basic Income, however small, might be our society’s only survival tool.”

If only we had all understood and accepted  the benefits of a hard landing.

Professor Joseph E. Stiglitz should be ashamed of himself for arguing racial profiling was a major cause of the 2007/08 subprime mortgage crisis

Nobel Prize winner Joseph E. Stiglitz, in “When Shall We Overcome?” Project Syndicate, March 12, 2018 writes: “America’s financial sector targeted African-Americans for exploitation, especially in the years before the financial crisis, selling them volatile products with high fees that could, and did, explode.” Thousands lost their homes, and in the end, the disparity in wealth, already large, increased even more. One leading bank, Wells Fargo, paid huge fines for charging higher interest rates to African-American and Latino borrowers”

No! America’s financial sector did not target any special community”. It targeted extraordinary returns on equity made possible by the process of securitization teaming up with extremely lousy bank regulations.

1. A part of the financial sector targeted originating and packaging very lousy high interest rate mortgages into AAA rated securities, because that is how you make real big money in the process of securitizing. Packaging an AA rated mortgage into an AAA rated security is not even worth the effort. Packaging a $300.000, 30 year, 11% fixed rate mortgage, and getting an AAA rating on the resulting security, that would allow you to perhaps sell the mortgage as if 6% was a reasonable rate, something which would allow the team to pocket $210.000 in immediate profits.

2. In 2004, bank regulators approved that if those securities had an AAA rating, or if an AAA rated corporation (AIG) had sold a default guarantee on such securities even if it had worse credit ratings, then banks needed to hold only 1.6% in capital, meaning they could leverage 62.5 times with it. If banks thought they could only make 1% in net margin on those securities, then they could expect 62.5% yearly return on equity… and frankly who could resist such a temptation.

Put those two things together and you have 99% of the explanation you need without having to enter into any sort of racial profiling arguments.

Professor Stiglitz having served in 2009 as the chairman of the U.N. Commission on Reforms of the International Monetary and Financial System, where he oversaw suggested proposals and commissioned a report on reforming the international monetary and financial system, should know all that very well, and so he should be ashamed of himself for doing so.