Adjusting to rough-times in the city

There once was a city so nice that even if they only visited it a month a year many owned apartments there. And since those wealthy owners spent lavishly during their short stay, and accepted to pay any normal property taxes, the city and its long-term residents, all benefited greatly.

But then the city fell on hard times and some not too bright city authorities, decided they should impose a special tax on these 2nd home owners.

And as a result, many short-termers, given the city was for the time being just not as attractive as before, decided they were not willing to pay this extra tax, and put many of these properties up for sale… and so the prices on both 1st and 2ndhome apartments fell drastically; and with-it the assessment values; and with-it the city’s property tax income… and, of course, many of the usual visiting big spenders kept away. The city had been placed on a slippery downward slope.

What could otherwise be done? 

What about an offer of, “anyone spending at least two months in their 2nd home in the city, will get a special rebate on their normal property tax”?

What about a reduction in the tax rate applicable to the rental income of all 2nd homes in the city?

@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 😩

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.

Democracy a la venezolana

At the moment, everything is black or white. It is either "yes" or "no". There is no possibility for a "yes plus" or a "no minus". Normally, when hesitant, one is the target of all type of efforts to win you over. Currently, one is ignored and irrevocably branded as an enemy by both sides

In these circumstances, to put one’s head into today’s debate about the constitution is risky unless this is done firmly within the traditional Venezuelan concept of neither one, nor the other, but just the contrary.

At an interesting conference by Alberto Rial on competivity in times of crisis which I attended, the eternal conflict was raised once again about how to straighten out our path to the future. In this sense, in order to plot a proper course, which we wish to do, it would be necessary to leave by the wayside a series of cultural values which could lead to the possibility of becoming irreversible Swiss, which we do not wish to do.

One of the few sectors that has showed incredible vitality in these times of economic recession is the lottery. It has now become the most important capital market in the country, to the point that it has probably also become the nation’s biggest creator of jobs after the consolidated public sector.

In order to rise to the occasion and to find democratic solutions that fit within the framework of our reality and our national values, the following occurs to me:

The Parliamentary Lottery Law

Art. 1 – Of Congress. Congress should be composed of 200 members, of whom 40, whose five-year term expires, should be retired every year on the 19th of April. A new group of 40 would be elected to replace them.

Art. 2 – Of the Election of Members of Congress. The election of the new members of Congress will be done by way of a lottery among all Venezuelans who have achieved an academic degree above Bachillerato (High School). They must also have expressed their desire to participate and to serve the Nation as a Member of Congress and have purchased a ticket worth Bs. 25,000.

Since some people may question the seriousness of this proposal, I would like to highlight some of its more favorable aspects.

Anyone that has studied finance should remember the story of the blindman throwing darts against a board on which are pasted the names of all stocks traded on Wall Street. By investing on the first 100 he hits, he has a much better chance of striking it rich, than someone who spends even 1$ looking for the sage advice of a banker on share selection.

None of the Members of Congress that are selected will have had to invest one single minute, or dime, in the task of cementing those relationships of dependence and conflict of interest that induce action by authorities that so often harm national interest.

The limited duration of Congress (five years), without a real chance of hitting the lottery again, will stimulate the members to do the best they can during their tenure. On top of this, the cost of the ticket to participate will cover the cost of the process.

If we did this, we would undoubtedly have much better representation of the country’s good intentions. Evidently, as in every average, many would be useless. This is most common today. However, those that do cut the mustard, would be able to work in a much healthier environment.

With today’s proposed system, it is perfectly possible to insure a truly random selection in which the only innocent hand is God's.

Finally, much to my sorrow, I realize that the prospects that this proposal will be implemented are very slim. The reason for this is that in many ways, democracy has become a business, and in this sense all those participating, such as fund raisers, bus drivers taking people to meetings, political analysts, publicity firms will oppose the elimination of the traditional electoral system.

Of course, I propose we use the lottery method only in those cases where the results mean we can and must live with an average. In the case of the President, for example, in which only one person is finally elected, there is definite advantage in going the traditional, straightforward election route.

When I analyze the advantages of the lottery system, as any proud father would do, I am convinced that its democratic characteristics are such that there must be more than one Swiss national who must be thinking about the possibility of applying for Venezuelan citizenship. Irreversibly.

Banking - between mirrors and piglets

Although I have never worked in the banking sector, I do remember, during the latter part of the seventies, being proud about the development of Venezuelan banks. I thoroughly enjoyed listening to anecdotes such as the fact that the most popular software application (i.e. SAFE) for the management of on-line banking operations had been developed in Venezuela. 

I was also aware of the fact that on-line banking in the country was being applied to a much greater degree than in the United States. I loved to read in the press about the participation of Venezuelan financial institutions in international loan syndications, although while doing so I pondered about the sanity of this participation and had the same ambiguous love-hate feeling as when I flew overseas with VIASA, our flagship airline. 

Finally, the fact that Venezuelan banks routinely appeared in “The Banker” magazine’s listing of largest banks, made reading this publication in London waiting rooms quite agreeable.

Twenty years later, I cannot but feel somewhat humiliated when I am asked to feel respectful and thankful that we are now to be the beneficiaries of new banking technology that in my humble opinion for the moment merely seems to imply substituting the small mirrors used by the Conquistadores to seduce the continent’s Indians with little plastic piglets.

Let me make it clear that my possible observations as a Patriot about the strategies established by financial Neo-Royalists are certainly not based on the rejection of the presence of foreign banks in general, much less of Spanish financial institutions, which due to their high profile will undoubtedly bear the brunt of humoristic expressions so proper of the Venezuelan populace. 

On the contrary, I am certain that there is an important place for foreign banks in Venezuela, although I would have liked to see an early aperture of the financial system aimed more at strengthening than at the reconstruction, in the style of the mythical Phoenix, of a system in ruins.

What motivates me is that an excessive praise heaped on the newly arrived foreign bankers, in addition to possibly causing unnecessary damage to the egos of our local bankers (that famous patriotic cry, “Vuelvan Caras”, is already audible in banking circles), clearly tends to confuse the issues and principal causes of the collapse of our financial system.

History can be written in a few words. A series of devaluations, the breach of exchange guarantee contracts, restrictions on offshore positions, obligatory preferential treatment for certain sectors of the economy, minimized participation in the financing of petroleum industry projects and surprising macroeconomic policy decisions such as the application of exorbitantly high real interest rates. 

All these factors caused a drastic decline in the quality of bank loan portfolios and an erosion of their respective net worth values to a minimum. Responsibility for all these ills lies principally with the Central Government and their main cause is again the fundamental failing of our society, i.e. the excessive concentration of national wealth in the hands of the State.

Each case must by analyzed separately but in general terms, I’m certain that should the United States, the United Kingdom and even Spain have had to suffer through similar catastrophes, the mortality rate would have been the same or higher. Likewise, I’m sure that the future productivity of Venezuelan banks will depend more on the rectification of the State’s actions than on the masterly lessons in banking we may receive from, with all due respect, the Casa Cándido strategists (Casa Cándido is a restaurant in Segovia famous for its servings of roasted piglet).

A better supervision of the banking sector by a professional Superintendency; reasonable norms that regulate the banking activities without strangling it; development of management capabilities that would insure the proper handling of banking crises without multiplying their initial cost; and responsible, professional bankers. 

All the above certainly must exist in order to head off another financial tragedy in the future, but they are certainly not enough to avoid such disasters.

As long as the size of Venezuelan State is not reduced in proportion to the private sector and the State continues to impose its omnipresent influence over all aspects of national life, the possibility of creating and environment of economic rationality is remote. Without economic rationality there is no way to avoid another financial crisis. Today’s generation of local bankers hopefully has already learned its lesson and I sincerely hope our newly arrived visitors will not have to do so as well.