Ideas on how to start discussions and implementation of a Universal Basic Income, or Societal Dividend

We must all be aware that the Redistribution Profiteers will be out on force trying to confuse the discussions on Universal Basic Income. 

Therefore I believe some very few principles needs to be established and firmly held on to.

First that we are always talking about a “basic” universal income that in no way should reduce the incentive of people to try earn some additional income. In essence it could initially be argued as a complement to the gig economy.

The UBI should start to be tested in low amounts that are slowly moved upward in line with the experiences.

It should be clear from the very start that all UBI needs to be funded with real money… no funny inflationary money. Initially it should be funded exclusively with taxes already collected; although special taxes like on pollution could also be useful to align UBI with other important objectives.

From the very beginning we need to identify who could provide the payment services in the cheapest way possible. 

And then of course it needs to be clear that UBI is NOT a government handout. It is a societal dividend decreed by all the shareholders, all the citizens.

http://perkurowski.blogspot.fr/2016/04/the-wealthy-and-poor-should-all-be.html

PS. Since corporate taxes only dilute citizen's representation, all such revenues should help to fund a Universal Basic Income.

Curses and blessings quite often come hand in hand

I will keep here my reflections on the subject in Kenneth Rogoff’s book “The Curse of Cash”. (For full disclosure I have yet not found the time to read it in its entirety)

In my comments I will often also refer to Professor Rogoff’s blog.

Kenneth Rogoff writes: “But for all the advantages of cash, we have to recognize that the current system is badly off kilter. A lot of central banks and finance ministries know it, as do justice departments and tax authorities.”

I fully agree, 100%, but do “We the People know it? There are reasonable and unreasonable doubts out there. And I am not 100% sure among which of those mine could best qualify.

Should not abolishing larger anonymous practical ways of storing wealth have to be subject to something like a referendum? I have no idea?

Yes cash might cause some local tax evasion, but does anyone really believe that big tax evaders keep their fortunes in cash like some seem to say? I just know that the word “cash” is open to all types of confusions (that are sometimes exploited)

Cash in hand, if devalued, looses its value equally for all. Non-cash can be devalued discriminatorily. Do we want our grandchildren to be subject to such great Big Brother power? As a Venezuelan, not me for sure!

Cash, as can oil, can indeed be a curse. But does that mean that we in Venezuela should stop extracting oil? I don’t think so.

And how would the elimination of for instance $100 bills, that might represent about one trillion dollars take place? I have no clue.

Would it not just dramatically increase the value of other assets? Not much, it seems like peanuts when compared to what is done with Quantitative Easing.

Do I want cash to assist drug trafficking? Of course not, don’t be silly.

Rogoff writes: “but most world holdings of dollars are in the underground economy (crime and tax evasion). I am not sure. First of all because I do not agree that all underground economy must be either illegal or bad. Then because I think criminals have many alternatives of how moving cash into something else. Moreover, much cash might make even many hardened criminals nervous.

Low interest rates, by inspiring laziness, sometimes also act as a determent to economic activity

I just want to add a factor that I feel has been ignored in all the ongoing debate on how low or even negative interest rates can stimulate economic activity.

During my life as a financial and strategic consultant, I have often seen how the pressure of the interest-costs-clock on projects, have really inspired these to get going, to execute fast. In other words, low interest rates can also inspire laziness.

What a great deal! Take loan at negative interest rates... do nothing... stay in bed... repay... and profit!

My number umpteenth effort to explain to XXX the very bad of current bank regulations.

A “risky asset” yields more, let us say 15%.

A “safe asset” yields less, let us say 5%.

And those yields would be deemed by the market as equal risk adjusted yields.

And market participants would buy those assets according to their needs and risk appetites.

But then came the Basel Committee for Banking Supervision with its risk weighted capital requirements for banks, more risk more equity – less risk less equity, and that completely distorted the allocation of bank credit.

Because now banks could leverage their equity more with safe assets and thereby obtain higher risk adjusted returns on safe assets than with risky assets.

As a result the overall market demand for safe assets increased, and that of risky assets decreased. That “risky asset” yielding 15% before, might now have to yield 16% or more. That “safe asset” yielding 5% before, might now just yield 4% or less.

Is this good? Of course not! Regulators, probably without even understanding what they were doing, altered the free market’s risk assessments; causing dangerous overpopulation of safe havens; and, for the real economy, equally dangerous under-exploration of the risky bays where SMEs and entrepreneurs usually reside. 

The net result of it is:

Crises, like that of 2007-08, resulting from excessive exposures to what was perceived, decreed or concocted as safe, like AAA rated securities and loans to sovereigns (Greece)

Stagnation, resulting from all the stimulus, like that of QEs, not flowing freely to where they are most needed, but only populating more and more the remaining safe havens.

In other words this damn piece of regulation has our banks no longer financing the riskier future but only refinancing the safer past; and so we are doomed to doom and gloom, and to run out of safe havens.

Of course, having set the risk weight for loans to sovereigns at 0% and to We the People, the regulators also introduced, through the backdoor in 1988, a powerful pro-statism tool.

The distortions are not even acknowledged by the regulators, much less discussed.

God help needing pensioners and job seeking youth! God help us all!

PS. If you have understood this and want more details on the greatest regulatory faux pas in history you might want to read the following more extensive aide memoire.

PS. Here are some of my past explanations for dummies.

PS. Today 50% of my constituency, my grandchildren, gets to be 5 years old.

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.

The solutions I offer are ignored. Might it be because these provide too little business to expertize and redistribution profiteers?

Before the 2007-08 crisis there was some economic growth resulting from a big expansion of credit, which was fed by some very low capital requirements to banks and that allowed these to, in some cases, leverage their equity over 50 to 1.

Then disaster struck, as a consequence of excessive exposures to what had very little capital requirements, like loans to sovereigns (Greece), investments in AAA rated securities and the financing of houses. 

In panic, floods of money, for instance by means of QEs, were poured over the economies, with little results to show for it, and now, the most important world economies, are stuck. Any additional stimuli, be it by means of public borrowing for infrastructure projects, QEs or low or negative interest rates will only complicate matters much more... like for pension plans.

The truth is that trying to get strong and sustainable economic growth, while keeping in place credit risk-adverse capital requirements for banks that exclude SMEs and entrepreneurs from fair access to bank credit, is just impossible.

What to do?

1. Very carefully remove the risk-weighted capital requirements for banks that distort the allocation of bank credit to the real economy. In order to make sure banks have sufficient capital while adapting, and that credit is not constrained, central banks could offer to purchase some of their bad portfolios, with the understanding that no dividends would be paid until these portfolios had been repurchased by the banks. (See what Chile did)

2. Create new demand (and lessen inequalities), by means of 100% tax-funded Universal Basic Income schemes. One of these could, if funded with carbon taxes, also help with environmental sustainability.

I have been arguing against the risk weighted capital requirements for banks for soon two decades, and I have explained many of its mistakes over and over again. I have yet not been able to obtain one single answer from those responsible, like from the Basel Committee or the Financial Stability Board. Could it be because they have no answers? 

Or could it be that my counter proposals are too straightforward, to simple, and would therefore erode the earnings potential of bank regulators (and consultants), of climate change and inequality fighters, and of the general expertize and redistribution profiteers?

Or is it that I just don’t know what I am talking about? It could be, though I think I can prove I do know by means of somecertifiable early opinions on these issues.

With interest rates and bank credit officially manipulated, what market-fundamentalism does statism's nobelist Stiglitz refer to?

We have many central banks purchasing public debt in outrageous amounts, and thereby manipulating and distorting all interest rates yield curves in favor of their governments.

And the regulators, with their risk-weighted capital requirements, allow banks to leverage much differently their equity, depending on the ex ante perceived or decreed risk; something which distorts entirely the allocation of bank credit to the real economy.

And since the risk weight of the Sovereign has been decreed 0%, while that of We the People has been set at 100%, most of that regulatory manipulation is in favor of the government.

And then time after time we hear experts, like Nobel Prize winner Professor Joseph Stiglitz, attributing most of our current problems to neo-liberalism and market fundamentalism; and often suggesting that the solution lies in increased government spending. What free markets are they referring to? In Stiglitz case, could it be he is only a statist nobelist creatively adapting the facts to his storyline?

PS. I have not read Stiglitz’ “The Euro” yet but, from what I hear he does not link Euro’s troubles in any way to loony bank regulations.  The Euro did indeed present challenges but, when in Venezuela I wrote my “Burning the bridges in Europe”, I had no idea it would also have to face such statist and distorting regulations.

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 more an expression sadist statism.

Friends, if you ever get a chance to talk with a bank regulator ask him this, and then you’ll know they don’t know

Sir, by using risk weighted capital requirements you allow banks to leverage assets differently, something which influences differently the banks' risk-adjusted returns on equity. Don’t you think this could dangerously distort the so vital efficient allocation of bank credit to the real economy?

Sir, we see you have set a risk weight of only 20% for private assets rated AAA to AA; and one of 150% for those rated below BB-. Do you really believe that what is rated below BB- is more dangerous for the bank system than what is rated AAA to AA?

And when you then see him evading the issue by answering something else, then you have the right to know, as I do, that he and his colleagues have no idea about what they are doing… and are running scared people will find out.

PS. If you want further details on the bank regulatory monstrosity you can go HERE

The Basel Committee for Banking Supervision successfully staged a cloaked global statist coup

Supposedly to make our banks safer, in 1988, with the Basel Accord, Basel I, the Basel Committee for the purpose of setting the capital requirements for banks, declared the risk weight of the “safe” sovereign to be zero percent, and that of “risky” not-rated citizens, We the People, to be 100 percent.

That meant banks needed to hold much less or no capital at all, when lending to the sovereign than when lending to citizens; which meant banks could leverage their equity and the support they received from society (taxpayers) much more when lending to the sovereign than when lending to citizens; which meant banks would earn higher risk adjusted returns on equity when lending to sovereigns than when lending to citizens; and which meant banks would favor more and more lending to the sovereign over lending to the citizen. And the SMEs and the entrepreneurs basically here represent the “not-rated citizens”.

There could be some discussion on whether lending to sovereigns represent less risk than lending to SMEs and entrepreneurs. I do not believe so. Banks do not create dangerous not diversified excessive exposures to SMEs and entrepreneurs; and, at the end of the day, the sovereign derives all its strength from its citizens. 

But what cannot be discussed is that implicit in these regulations, is the belief that government bureaucrats use bank credit more efficiently than SMEs and entrepreneurs, and that is pure and unabridged dumb runaway statist ideology to me.

For a starter, without this kind of regulatory subsidy, the Greek sovereign would not have been able to obtain so much credit. 

And then, without this kind of regulatory tax on private initiative, Greece will never be able to work itself out of its current predicament.

And the world keeps mum on this!

We must allow our banks to be banks again.

“I honestly don't understand why people vote against Universal Basic Income UBI”. Well here are some reasons.

The most general reason, thanks to arguments spread around by interested redistribution profiteers, is that by means of a UBI many will receive more than they should… in terms of what they need… and without reflecting enough on what is being redistributed, a societal dividend, really signifies.

The second reason is that many might consider that for some, given their special needs, a UBI does not suffice to keep them out of unfair unacceptable hardships… and without reflecting that not only nothing with UBI states a “that’s all folks!”… and again without reflecting enough on what is being redistributed, a societal dividend, really signifies.

Three, most those who carry out research on the consequences of UBI are, one way or another, often the recipients of re-distributional favors, and therefore have a bias against UBI.

For, bad proposals, look at the Swiss referendum. “2500 Swiss Francs or $3500 — would be paid to every citizen, for their whole life, no matter where they live. Those with a job could still work but would have the monthly income deducted from their salary.” 

Sincerely in such as referendum, I would also vote NO!  At about 50 percent of the GDP per capita, it is way too much. In Switzerland a number like $1.000, and expressed as a percentage of GDP or a percentage of average salaries, would be a much more reasonable level at which to start this social experiment.

And of course the idea of those working not getting the UBI plays directly into the hands of those arguing that UBI could cause people to work less.

So what is a Societal Dividend? Here is my take on it.

It is an amount transferred to anyone independent of having been able to capitalize on society’s strengths, like having been able to get a job.

It could be seen as an effort to grease the real economy by combating the natural concentrations of wealth.

It could be seen as a substitute for all those redistribution efforts that because of their complexity is bound to attract the profiteers.

It is a well-funded transfer, no funny money, from citizens to citizens, not depending on government favors. It could therefore be seen as an effort by citizens to become more independent of that populism and demagoguery that often lies behind all societal redistribution.

The way it is funded, could help to align the incentives for other societal causes, for instance if with carbon taxes, with the efforts for a better environment.

Candidates to president or prime ministers, for our own good, should have spent years in solitary confinement.

We should require everyone aspiring to be president or prime minister, to have spent 10 years or more in solitary confinement, getting his own life priorities sorted out, before he has earned the right to rearrange ours.