Was it an accident or is it a statist setup?

In 1988, suddenly, without asking anybody, least us citizens, bank regulators, for the purpose of setting the capital requirements for banks, decreed the risk weight of the sovereign, the government, to be Zero Percent, while the risk weight for We the People was set at 100%.

Not having to hold capital against sovereign debt permits banks to lend to government at lower rates; which translates into a regulatory subsidy of government debt.

Then in response to the 2007-08 crisis, itself a result from distorting bank regulations, central banks launched quantitative easing, which basically meant injecting liquidity into the economy by purchasing government debt; and for example the Fed has ended up with about of US$ 4.5 trillion in government paper.

Much of the liquidity injected went to prop up real estate, bonds and shares, but a lot of it spilled over into more demand for government paper.

Naturally, interest rates for public debt fell, and many, like pension funds, in order to adjust for their liabilities, had to purchase even more public debt.

And while regulatory subsidies of public debt are kept in place, this vicious circle will continue.

And to top it up, too many “experts” now advance the argument that government should take advantage of these low interest rates, to launch infrastructure projects.

Let me be very clear about it, the fact that government might (artificially) even be paying a negative rate on its borrowings, does not mean it should borrow, because it is still very capable of investing those funds in projects yielding even more (real) negative rates.

I do not know how we got to this point, whether by accident or whether a set up by runaway statists. You tell me!

PS. When utilities were being privatized in South America, I often heard accusations in terms of “savage neo-liberalism”. Since these utilities were not adjudicated to whoever offered to serve us citizens the best and the cheapest, but to whoever offered to pay the government the most, a tax advance that left us with a huge bill to pay at private investment rates of return, to me those privatizations were much more an expression of sadist statism.

And why does not the US use the World Bank for their infrastructure needs.

Felix Rohatyn and Warren Rudman in “Federal action is needed to rebuild America” Financial Times August 23, come out in support of a proposal for a new bank to address “the critical needs of infrastructure”. This, at least in Rohatyn’s case, being from the private sector sounds a bit surprising. But, if they are right, why would the US need a new bank for that? … when there is International Bank for Reconstruction and Development, IBRD, better known as the World Bank.

Not only would the US by using the World Bank set a great example and help to scale that institution for some really big globalized action that might be needed but also, at least for a start, the World Bank would probably be quite covenant lite… sorry I mean conditionality lenient with the US.

If I were president (II)

In yesterday’s installment I mentioned the fact that the first thing I must receive in order to responsibly comply with my presidential obligations are certain special powers. Supposing I actually received these powers, I then began to list some of the concrete measures as an example of what I would do during the first 100 days of my term in some specific areas of concern. Here are some more.

Education: A single, all encompassing data base must be put together, identifying each and every active teacher on a school-by-school basis. These teachers will immediately receive an increase in pay and an additional fixed percentage of the payroll amount will be awarded each school to cover administrative expenses. Evidence of false information will result in the immediate suspension (for lying, aiding or abetting) of all the teachers of that particular school. All others that are unduly receiving pay without working from the Ministry of Education will be awarded eternal vacations without pay.

Reduction of public spending: In order to rationalize public spending, as similar strategy as the one above will be implemented. All personnel that are to be dismissed will be paid the equivalent of three month’s salary and all other severance payments will be paid in the form of negotiable Public Sector Restoion Bonds (PSRB). The value of these bonds will increase in the measure that restoration of the public sector is successful.

Infrastructure: All savings from the restructuring process will be invested, after covering fiscal deficits over 3% of GNP, in infrastructure projects, such as energy and water for Margarita and Zulia and a truly nationwide railway system.

Housing: The Central Bank must immediately make available through the private banking system, a credit facility to the tune of US$ 2 billion aimed at issuing long term loans in US$ and fixed rates for acquisition of housing.

Foreign investment: Foreign capital investments will be regulated in order to minimize damage caused by short term capital flight (i.e., the Mexico syndrome). Other countries in Latin America have such regulations in place.

Economic diversification: The oil sector does not create employment. Venezuela’s commercial policies must be renegotiated to achieve the equilibrium of our trade balance in terms of employment generation and not balance in monetary terms as it stands now. An annual budget will be allotted to allow for the protection of certain sectors of the economy, specifically agriculture. Cover under this scheme will be allocated to those sectors within agriculture that we can be competitive in without excessive costs (i.e. rice rather than apples).

Petroleum/Petrochemicals: PDVSA will continue to manage the development of our petroleum industry. However, a special Office of the Petroleum Ombudsman (OPO) will be created. This will allow the common citizen to get closer and to increase his knowledge and control of what is the country’s principal asset. The members of this office will be elected at random from among a list of candidates that have been carefully screened, have complied with some basic requirements and have been presented as such by the Venezuelan people. The Office will be initially asked to analyze why the industry is spending its precious resources in rebuilding a slew of gas stations. In the same sense, I would like to insure that our petrochemical industry is not just reopening Sidor’s covered grave with its new investments.

Taxes/Duties: There will be no more value added tax (VAT) as long as the country continues to perceive significant income from oil. Customs at our ports will be handed over to the private sector management. This will ensure that income that should reach government accounts does not continue to feed unscrupulous individual pockets.

Superfluous functions: Until the State begins to perfectly comply with its responsibilities in fundamental areas such as education, health and security, all other superfluous functions will be suspended. For example: if the local stock market really needs a regulatory entity such as the National Security and Exchange Commission, the market must cover the costs incurred. Today, it is preferable to stamp each issue with the words “Beware – Not Regulated” than to create the false illusion that some control is imposed, and in some instances, actually abet fraud through simple omission.

Day 100 – Evaluation: If my team and I are not able to successfully implement our government’s plans, we must resign and convene new elections. Remember, I have initially made a promise to resign without pension and without a seat as Senator for life in order to avoid a) further degeneration of the stature of the office of the President and b) wasting another four years and nine months of this poor country’s destiny.