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.

 

Bank regulators, mixed and served us their Basel Accord cocktail... and since, they tell us all to sing: “Don't worry, be happy.”

The Basel I Accord (28 pages) was published in July 1988 by the Basel Committee on Banking Supervision:

Risk weighted bank capital requirements with decreed weights:

0% Sovereigns, 50% residential mortgages and 100% private sector.

The film Cocktail in July 1988, released "Don't Worry Be Happy" by Bobby McFerrin.

Here's a little song I wrote

You might want to sing it note for note

Don't worry, be happy

Basel II (239 pages) was published in June 2004.

Decreed risk weights: AAA to AA rated 20% - Below BB- rated 150%

The global financial crisis, 2008-09, caused by mortgage backed securities MBS ensued. 

The land-lord say your rent is late

He may have to litigate

Don't worry, be happy

Basel III: A global regulatory framework for more resilient banks and banking systems - revised version June 2011.

In every life we have some trouble

But when you worry, you make it double

Don't worry, be happy.

Basel III, July 2024, often retitled as an “Endgame” (for the times being only 1,910 pages), is still being worked on.

But on the margin, where it most counts when banks decide in what to invest, the risk weighted bank capital equity requirements, they still reign supreme.

And many nations and many of its citizens, having to take on new debt only to service the debt they already owe, have turned into zombies. What a hangover headache that cocktail has given us! BUT they still tell us:

Don't worry, it will soon pass

Whatever it is

Don't worry, be happy

If 1988’s Basel I had been imposed thirty years earlier, would the Berlin Wall have needed to fall?

1988, with Basel I, a Global Statist Revolution was launched. It was not to be acknowledged, much less televised.

Here's a very brief but yet 99% description of it:

It imposed risk weighted bank capital/equity requirements explained by the following decreed weights:

Central government debt: 0% 

Residential montages: 50%

Loans to e.g., small businesses and entrepreneurs: 100%

With the basic 8% capital requirement imposed, that translated into following capital/equity requirements:

Central government debt: 0% 

Residential montages: 4%

Loans to e.g., small businesses and entrepreneurs: 8%

That allowed the following bank capital/equity leverages:

Central government debt: unlimited

Residential montages: 25 times to one

Loans to e.g., small businesses and entrepreneurs: 12.5 times to one.

And all that translates, de facto, into:

Bureaucrats and politicians knowing better what to do with bank credit for which repayment they’re not personally responsible for, than small businesses and entrepreneurs. 

Residential mortgages being more important for the economy than loans to small businesses and entrepreneurs.

End of explanation.... and you do not need to take my word for it:

Paul Volcker, in his autobiography "Keeping at it" of 2018, penned together with Christine Harper confessed:“The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages. The American ‘overall leverage’ approach had a disadvantage as well in the eyes of shareholders and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities."

Later, without much altering Basel I’s rulings, 2004 Basel II introduced risk weights much dependent on credit ratings; a systemic risk. Again, in words of Paul Volcker “Ironically, losses on sovereign credits and home mortgages would fuel the global crisis in 2008 and a subsequent European crisis in 2011.” 

Currently: Basel III, yet not fully decided or implemented, diminishes the differences in allowed leverages but, on the margin, there were it all counts, the favoring of “safe” assets over “risky” ones, still reign supreme.

And that’s what has, in much of the world, generated extremely high levels of central government debts and residential mortgages. It would be hard to argue that the economy has grown sufficiently strong and resilient, so as to be able to service those levels of debt. If you doubt me, ask ChatGPT. 

Summing up; decreed risk weights: 0% Federal Government – 100% We the People introduced financial communism, which is the reason for the question of this brief note.

Sadly, if Basel I had been implemented three decades earlier, both Russia and America, West and East Germany, would then all have become so weakly alike.

Would then John F. Kennedy have delivered his 1963 speech "Ich bin ein Berliner" in 1989? No! Not the John F. Kennedy we knew.

Would then Ronald Reagan have told Mr. Gorbachev in 1987 “Tear down this wall!”? No! Not the Ronald Reagan we knew.

Would the Berlin Wall then have fallen? 

Why would that then have been necessary? That wall had simply become a useless Maginot Line.

In summary,  by means of bank regulations the virus of communism contaminated the Western Free Market World. And, incredibly, so many still opines it's living under the "weight" of neoliberalism.

Why have universities, especially its professors in economic and finance, kept conspicuous silence on this? Is it because they all want to be members or beneficiaries of the so empowered reigning Bureaucracy Autocracy?

I would now ask any East Berliner old enough to remember his life before 1988: 

When now seeing the farmers striking and suffering electricity shortages, do you not experience some Deja vu?

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.

The capacity to borrow at reasonable rates is a strategic sovereign asset

In his April 13 op-ed, "How economists led us astray," Robert J. Samuelson wrote, "What we conveniently overlooked was the need to preserve our borrowing power for an unknown crisis that requires a huge infusion of federal cash."

Yes, the capacity to borrow at a reasonable interest rate (or the seigniorage when printing money) is a very valuable strategic sovereign asset, and it should not be squandered away by benefiting the members of the current generations or with some nonproductive investments. 

So, when public borrowings are authorized, that should require Congress being upfront that a part of that borrowing capacity is being consumed, which has a cost, and give an indication of who (children or grandchildren born what year) are expected to have to pay back that debt.

Mr. Samuelson also referred to "low dollar interest rates [that] will keep down the costs of servicing the debt." Sadly, those current "low dollar interest rates" are artificial rates, much subsidized in that since 1988, with Basel I regulations, banks are not required to hold any capital against Treasuries, and of course subsidized by the Federal Reserve purchasing huge quantities of Treasuries.

PS. A reverse mortgage on our children’s and grandchildren’s future

http://unsustainabledebtsustainability.blogspot.com/2020/04/the-capacity-to-borrow-at-reasonable.html

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. 

If one were to construe a systemic risk that could bring bank systems down, this is one way

First: Make capital requirements for banks based on perceived risk. More risk more capital, less risk less capital. That would allow banks to leverage more with The Safe than with The Risky. That would allow banks to earn higher risk adjusted returns on equity lending to The Safe than when lending to The Risky.

Second: Allow banks to use their own risk models to decide what is risky and what is safe and therefore how much capital it needs. Alternatively allow some very few human fallible credit rating agencies to decide what is safe and what is risky.

Third: Sit down and wait for banks lending too much against too little capital to The Safe, like sovereigns, the AAArisktocracy and mortgages; within an economy weakened by too little lending to The Risky, like to SMEs and entrepreneurs.

But, oops, hold it there! Someone already did that! I think it was the Basel Committee for Banking Supervision.

Basel risk-weights: Sovereign (Monarch) 0%, AAArisktocracy 20% and citizens 100%: And the world said nothing!

With the Basel Accord of 1988 (signed one year before the Berlin wall fall) regulators, for the purpose of setting the capital requirements for banks, assigned a 0% risk weight for loans to the sovereign and 100% to the private sector. Some years later, 2004, with Basel II, they reduced the risk-weight for loans to those in the private sector rated AAA to AA to 20%, and left the unrated citizens with their 100%.

That has introduced a considerable regulatory subsidy for the bank borrowings of the infallible sovereign (government bureaucrats) and of those of the private sector deemed almost infallible. And that has severely taxed the access to bank credit, of those deemed as risky, like SMEs and entrepreneurs.

That de facto means that bank regulators believe that government bureaucrats know better what to do with bank credit than citizens.

And the world said nothing! What's wrong? Have all gone statist?