A letter in Washington Post: "The economic revolution"

The economic revolution

In his Aug. 17 op-ed, “Team Biden wants an economic revolution,” Robert B. Zoellick wrote, “National security adviser Jake Sullivan has argued that reliance on private businesses and markets has resulted in major economic and social failures. The Biden administration instead relies on state direction in areas of the economy far beyond infrastructure, R&D and education.” That might be so, but such a revolution has already been going on for 35 years.

Former Federal Reserve chairman Paul A. Volcker, in his 2018 memoir, “Keeping at It,” co-written with Christine Harper, wrote that assets for which bank capital and equity requirements were nonexistent were what had the most political support, sovereign debt. A leverage ratio discouraged holding low-return government securities.

That referred to Basel I’s 1988 risk-weighted bank capital requirements with decreed risk weights: zero percent federal government, 100 percent taxpayers. If that’s not an economic revolution, what is?

Independent of Treasurys being safer than other bank assets, those risk weights de facto imply that American bureaucrats know better what to do with credit for which repayment they’re not personally responsible than, e.g., American small businesses and entrepreneurs.

What would the Founding Fathers think?

Per Kurowski, Rockville

“Assets for which bank capital and equity requirements were nonexistent were what had the most political support, sovereign debt.”
If that’s not a valiant, courageous and honorable confession by Paul Volcker what is?
Thanks Washington Post for not ignoring it.

THE STORY

That silent and not televised revolution, empowered a Bureaucracy Autocracy

 

Have these communist/fascist risk weights ever been debated by the US Congress or by SCOTUS?

 My other letters published in the Washington Post related to this issue:

September 6, 2007: Factors in the Financial Storm
June 20, 2008: An Aspect of the Bubble
December 27, 2009: Another 'worst': Faulty bank regulation
January 6, 2012: Handcuffed by a triple-A rating
May 1, 2013: An American approach to banking
December 23, 2014: Let the market rule on risky trades
November 11, 2015: Reverse-mortgaging the future
August 9, 2016: Banks, regulators and risk
April 16, 2017: When banks play it too safe 
July 11, 2018: There is another tariff war that is being dangerously ignored. 
December 30, 2018: Affordable homes or investment assets?
April 18, 2020: The capacity to borrow at reasonable rates is a strategic sovereign asset

Should human intelligence not suffice to understand what could happen when bank regulations subsidize government borrowings?

Here’ a brief summary of answers ChatGPT gave me on questions about bank regulations and excessive government debt. (You can read the full conversation in the link below).

Q. “If allowing banks to hold much less capital against government debt than against other assets, does that not translate into a de facto subsidy of government borrowings?"

ChatGPT: "Allowing banks to hold less capital against government debt compared to other assets can indeed be seen as a de facto subsidy of government borrowings.”

Q. "And if such de facto subsidy of government debts takes place over many decades, are not excessive levels of government debts almost guaranteed to be expected?"

ChatGPT: "If a de facto subsidy of government debt occurs over an extended period, it can potentially contribute to the accumulation of excessive levels of government debt. Here's why:

1. Lower Borrowing Costs: When banks are incentivized to invest more heavily in government debt due to lower capital requirements, it can lead to increased demand for government bonds. This increased demand, in turn, can lower the borrowing costs for the government. With cheaper borrowing, governments may be inclined to borrow more and accumulate higher levels of debt than they otherwise would if borrowing costs were higher.

2. Reduced Market Discipline: When government debt is perceived as having lower risk due to regulatory treatment, it can reduce market discipline. Investors may rely on the assumption that government debt is safer, potentially overlooking the true risks associated with higher debt levels. This reduced market discipline can create an environment where governments feel more comfortable in accumulating debt, as they may face less pressure to maintain fiscal discipline

3. Moral Hazard: A de facto subsidy of government debt can create a moral hazard situation. If governments believe that banks and financial institutions will always be willing to invest in their debt due to regulatory advantages, they may have less incentive to pursue responsible fiscal policies. This can lead to a lax approach to fiscal discipline and increased borrowing without adequate consideration of long-term sustainability.

It's important to note that excessive levels of government debt can have negative consequences, such as increased interest payments, reduced fiscal flexibility, and potential macroeconomic instability. Therefore, regulatory policies that inadvertently incentivize the accumulation of excessive government debt should be carefully assessed and monitored to ensure long-term fiscal sustainability and financial stability.”

My conclusion: I ask you all, sincerely, should human intelligence not suffice in order to give those answers?

Paul A. Volcker in his autobiography “Keeping at it” of 2018, penned together with Christine Harper, when referring to 1988’s Basel I wrote: “Assets for which bank capital requirements were nonexistent; what had most political support, sovereign credits. A ‘leverage ratio’ discouraged holdings of low-return government securities”

I’ve been asking over and over again whether the US Congress approved risk weights of 0% Federal Government – 100% We the People Frankly I do not think America’s Founding Fathers would have regarded that with great sympathy.

Here is the link with the full dialogue with ChatGPT on this issue.

Here my many other questions to ChatGPT – and Grok on bank regulations

#AI ChatGPT: Should US bank regulators take an oath to support and defend the US Constitution?

I asked ChatGPT:

"How credit is allocated is something of extreme importance to a nation. Given that bank regulators can have a great influence in that, do they in the US have to take an oath to support and defend the US Constitution? If not, should they?"

ChatGPT answered:

"In the United States, bank regulators are typically appointed by the government and are responsible for overseeing the banking industry to ensure its stability, integrity, and compliance with relevant laws and regulations. Bank regulators play a crucial role in the allocation of credit and shaping the financial system.

Regarding your question about whether bank regulators in the US have to take an oath to support and defend the US Constitution, there is no specific constitutional requirement for bank regulators to take such an oath. However, many government officials, including those involved in financial regulation, do take an oath of office that includes a commitment to uphold and defend the US Constitution. This oath is generally administered to government officials as a way to affirm their dedication to the principles and values enshrined in the Constitution.

The exact wording of the oath may vary, but it typically emphasizes allegiance to the Constitution, commitment to the rule of law, and the performance of duties faithfully and impartially. While there is no uniform requirement for all bank regulators to take this oath, many regulators, especially those serving in federal agencies, are likely to take such an oath or affirm a similar commitment to upholding the Constitution.

The decision of whether bank regulators should be required to take an oath specifically to support and defend the US Constitution is a matter of opinion and policy. Some argue that it could serve as a symbolic affirmation of their dedication to the principles of the Constitution and reinforce their role in safeguarding the financial system in line with constitutional values. Others may argue that existing oaths and legal obligations are sufficient to ensure regulators act in accordance with the Constitution.

Ultimately, any changes in the requirements for oaths or commitments of bank regulators would depend on the legislative and regulatory processes, as well as the prevailing views and priorities of policymakers and lawmakers in the United States"

I asked ChatGPT:

"For their risk weighted bank capital requirements US regulators assigned risk weights of 0% the Federal Government – 100% We the People Bank. If those regulators had to take an oath to defend the US Constitution, might that have had an influence on how they assigned risk weights?"

ChatGPT answered:

"I apologize for the confusion in my previous response. In reality, risk weights assigned to different assets and exposures are not typically based on political or ideological considerations such as assigning a risk weight of 0% to the Federal Government and 100% to "We the People Bank." Risk weights are determined based on the inherent risk profile and characteristics of the assets.

The assignment of risk weights for bank capital requirements is a complex process that involves assessing the creditworthiness, volatility, and historical performance of different types of assets. These assessments are generally conducted based on empirical data, statistical models, and industry standards established by regulatory bodies. The aim is to ensure that banks maintain adequate capital buffers to absorb potential losses associated with their asset portfolios.

While an oath to defend the US Constitution could influence regulators' general approach and commitment to the principles of fairness, stability, and protecting the public interest, it would not typically be a direct factor in determining specific risk weights for assets. Risk weights are primarily determined by the regulators' assessment of the credit risk associated with each asset class, including considerations such as historical default rates, collateralization, and market volatility.

It is important to note that the assignment of risk weights is subject to ongoing review and refinement by regulators to ensure that they accurately reflect the risk profile of assets. Regulators aim to strike a balance between maintaining financial stability and providing banks with sufficient flexibility to support economic growth through lending activities.

In summary, while an oath to defend the US Constitution might influence the overall principles and values guiding regulators' decision-making, it would not directly determine the specific risk weights assigned to assets in the context of risk-weighted bank capital requirements."

I asked ChatGPT: 

"You hold that for bank capital requirements the “risk weights assigned to different assets and exposures are not typically based on political or ideological considerations”

But what to say of Paul Volcker writing: “Assets assigned lowest risk, for which bank capital requirements were nonexistent or low, were what had most political support: sovereign credits and home mortgages. A ‘leverage ratio’ discouraged holdings of low-return government securities”?"

ChatGPT answered:

"You are correct in pointing out Paul Volcker's perspective on the risk weights assigned to different assets and exposures in the context of bank capital requirements. Paul Volcker, the former Chairman of the Federal Reserve, did express concerns about the risk weights assigned to certain assets, particularly sovereign credits (government securities) and home mortgages.

In his statement, Volcker was highlighting the fact that certain assets, such as government securities and home mortgages, were assigned lower risk weights, which resulted in lower capital requirements for banks holding these assets. This practice effectively incentivized banks to invest in these assets due to the lower capital charges imposed on them.

Volcker's argument reflects a viewpoint that the assignment of risk weights might have been influenced, to some extent, by political or economic considerations rather than solely based on the inherent risk profiles of these assets. This is particularly relevant for sovereign credits, as they often enjoy a perception of lower default risk due to the backing of the government.

However, it is important to note that risk weights for bank capital requirements are established through a combination of empirical analysis, historical data, and risk management considerations. While political and economic factors might indirectly influence the regulatory environment and the determination of risk weights, the primary objective is to ensure that banks hold sufficient capital to absorb potential losses associated with their asset portfolios.

Regulators continually assess and refine risk weights to ensure they align with the underlying risks of assets and reflect the evolving economic and financial landscape. The aim is to strike a balance between prudent risk management and supporting lending activities to foster economic growth.

In summary, while there may be instances where political or economic considerations have influenced the assignment of risk weights, the overall framework for risk-based capital requirements aims to be grounded in risk assessment and prudential regulation principles."

I asked ChatGPT:

"So, if political considerations might intrude on defining the risk weights for bank capital requirements, should not US bank regulators make sure these at least are in agreement with the general principles established by the US Constitution?"

ChatGPT answered:

"Yes, ensuring that risk weights for bank capital requirements are in line with the general principles established by the US Constitution would be a desirable objective. The US Constitution sets forth fundamental principles such as the rule of law, equal protection, and the promotion of the general welfare, among others. Aligning regulatory decisions, including the assignment of risk weights, with these constitutional principles can help promote fairness, stability, and the public interest.

While risk weights are primarily determined based on financial and risk management considerations, it is important for bank regulators to operate within the broader framework of constitutional values. This includes ensuring that regulatory decisions do not discriminate unjustly, infringe upon individual rights, or undermine the principles of fairness and equal opportunity.

Bank regulators should strive to promote financial stability and support a well-functioning financial system while adhering to constitutional principles. This can be achieved through transparency, accountability, and a commitment to upholding the rights and interests of all individuals and stakeholders affected by regulatory decisions.

While there may be challenges in precisely defining risk weights that directly reflect constitutional principles, regulators can certainly take into account the broader constitutional framework when formulating and implementing regulations. This involves considering the implications of regulatory decisions on the economy, society, and individual rights, and ensuring that they align with the overarching constitutional principles of the United States.

In summary, while risk weights are primarily determined based on financial and risk management considerations, US bank regulators should strive to ensure that their decisions are in harmony with the general principles established by the US Constitution. This helps to promote fairness, stability, and the public interest within the regulatory framework."

I asked ChatGPT:

"And if 'ensuring that risk weights for bank capital requirements are in line with the general principles established by the US Constitution would be a desirable objective' would it not be preferable that bank regulators had taken an oath to support and defend the US Constitution?"

ChatGPT answered:

"Yes, it can be argued that having bank regulators take an oath to support and defend the US Constitution would further reinforce their commitment to upholding the constitutional principles in their decision-making processes, including the determination of risk weights for bank capital requirements. Such an oath could serve as a symbolic affirmation of their dedication to the values and principles enshrined in the Constitution.

By taking an oath to support and defend the US Constitution, bank regulators would demonstrate their commitment to promoting fairness, stability, and the public interest within the financial system. It would emphasize the importance of aligning regulatory decisions with the constitutional principles of the United States, including the protection of individual rights, equal opportunity, and the rule of law.

While an oath alone cannot guarantee perfect adherence to constitutional principles or eliminate all potential biases, it can serve as a reminder and a guiding principle for regulators in their decision-making processes. It can help foster a culture of accountability and integrity within the regulatory framework.

Ultimately, the decision of whether to require bank regulators to take an oath to support and defend the US Constitution would depend on the legislative and regulatory processes, as well as the prevailing views and priorities of policymakers and lawmakers in the United States. It is a matter of policy and can be subject to debate and consideration."

I asked ChatGPT:

"What legislative process would be necessary for requiring US bank regulators to take an oath to support and defend the US Constitution?"

ChatGPT answered:

"Requiring US bank regulators to take an oath to support and defend the US Constitution would involve a legislative process that would vary depending on the specific jurisdiction and level of government involved. In the case of federal bank regulators, such as those overseeing national banks or the Federal Reserve, the process would typically involve the following steps:

1. Proposal: A bill or legislation would need to be drafted that includes the requirement for bank regulators to take an oath to support and defend the US Constitution. This bill could be introduced by a member of Congress in either the House of Representatives or the Senate.

2. Committee Consideration: The bill would then be referred to the appropriate committee or committees with jurisdiction over banking or financial regulation. The committee(s) would review and discuss the proposed legislation, potentially holding hearings to gather input from experts, stakeholders, and the public.

3. Markup and Amendments: During the committee consideration, the bill may go through a process called "markup," where committee members have the opportunity to suggest changes or amendments to the bill's language. These amendments may be proposed and voted on by the committee members.

4. Floor Debate and Voting: After the committee(s) have completed their consideration of the bill, it would proceed to the full chamber (House of Representatives or Senate) for floor debate and voting. Members of the chamber would have the opportunity to discuss the bill, propose further amendments, and ultimately vote on its passage.

5. Conference Committee (if necessary): If the House and Senate pass different versions of the bill, a conference committee may be convened to reconcile the differences and produce a single unified version of the legislation.

6. Final Passage: Once both chambers of Congress have approved the bill in identical form, it would proceed to the President for final approval. The President may either sign the bill into law or veto it. If vetoed, Congress can override the veto with a two-thirds majority vote in both chambers.

It's important to note that the legislative process can be complex and may involve additional steps or variations depending on the specific circumstances. The exact process and timeline for passing a bill can also vary based on political dynamics and priorities within Congress.

Furthermore, if the proposed oath requirement is specific to state-level bank regulators, the legislative process would take place at the state level, typically involving the state legislature and relevant committees.

Overall, the specific legislative process for requiring US bank regulators to take an oath to support and defend the US Constitution would depend on the jurisdiction and level of government involved."

 

Note: The answers are copied exactly from those given to me by OpenAI

PS. 2013 on bank capital requirements risk weights – US Congress – US Constitution

Here my many other questions to ChatGPT – Grok on bank regulations

#AI OpenAI - ChatGPT: What should we expect from allowing banks to leverage much more with government debt than with small business loans?

I asked ChatGPT:

"With risk weighted bank capital requirements that allow banks to leverage their equity much more with government debt than with loans to small businesses and entrepreneurs, what kind of economy should we expect? In what could it all end?"

ChatGPT answered:

"The impact of risk-weighted bank capital requirements on the economy is a complex and multifaceted topic, and it is challenging to make definitive predictions about the outcome. However, I can provide you with some general insights into the potential implications.

When risk-weighted capital requirements allow banks to leverage their equity more with government debt than with loans to small businesses and entrepreneurs, it can lead to several outcomes:

1. Favoring government financing: Banks may find it more attractive and less risky to allocate a larger proportion of their lending towards government debt rather than lending to small businesses and entrepreneurs. This can result in a greater availability of credit for government entities, potentially leading to increased government spending and investment.

2. Reduced lending to small businesses: With less favorable capital treatment for loans to small businesses and entrepreneurs, banks may be less incentivized to extend credit to these entities. This could limit access to financing for small businesses, potentially constraining their growth and hampering economic dynamism.

3. Impact on economic growth and innovation: If access to credit for small businesses and entrepreneurs is constrained, it may hinder their ability to invest, expand, and drive innovation. This can have broader implications for economic growth, job creation, and overall economic vitality.

4. Systemic risks: Overreliance on government debt and the concentration of risk in a specific sector (such as government financing) can pose systemic risks to the financial system. If there is a significant shock or default in the government sector, it could have far-reaching consequences for the stability of the banking system and the broader economy.

It's important to note that regulatory frameworks and capital requirements are subject to ongoing evaluation and revision. Authorities strive to strike a balance between promoting financial stability, encouraging lending to productive sectors, and managing risks in the banking system.

To understand the potential long-term outcomes and the overall impact of specific capital requirements, a comprehensive analysis of the financial system, economic conditions, and regulatory environment is necessary. Economic models, empirical studies, and expert analysis are typically used to evaluate the effects of such policies on the economy.

In summary, the impact of risk-weighted bank capital requirements on the economy depends on various factors and can have both positive and negative consequences. It requires a careful consideration of trade-offs and the broader economic and regulatory context to assess its potential outcomes accurately."

Note: The answers are copied exactly from those given to me by ChatGPT and Grok

 

My comment: It's what's safe that's risky

Here my many other questions to ChatGPT – Grok on bank regulations

Bank regulators were contaminated by the virus of totalitarianism

Mario Vargas Llosa in “The Call of the Tribe”, 2023, has a chapter titled Friedrich August von Hayek (1859-1992). It mentions Hayek, in “The Road to Serfdom” 1946, opining “that centralized planning of the economy inevitable undermines the bases of democracy, and that fascism and communism were therefore two expressions of the same phenomenon of totalitarianism. By the same token, all regimes, even those appearing to be free, would be contaminated by the virus of totalitarianism if they sought to control the functioning of the market.”

Paul Volcker in his “Keeping at it” 2018 (valiantly) confessed: “Assets assigned the lowest risk, [1988] for which bank capital [equity] requirements were therefore nonexistent or low, were what had the most political support: sovereign credits & home mortgages… A ‘leverage ratio’ discouraged holdings of low-return government securities”

Bank capital requirements with decreed risk weights 0% Federal Government and 100% We the People; could that have been a "spontaneous evolution of institutions"? NO!

Tell me, is that not about the greatest example of regimes appearing to be free, having been contaminated by the virus of totalitarianism, bringing fascism and communism by stealth?  (What would the Founding Fathers have opined)

All those declaring themselves followers, admirers and promoters of Hayek, how can they have ignored all this, for more than three decades?

On three side issues: 

Regulators allow banks to hold much less capital/equity when financing what’s perceived (or decreed) as “safe” e.g., public debt, residential mortgages and AAA rated, than when financing what’s perceived as “risky” e.g., loans to small businesses and entrepreneurs. I’m sure Hayek would have known, as any economist should have known, that such incentives had to cause dangerously much lending to the “safe”, and weakening too little lending to the “risky”

I’m sure Hayek would also have objected assigning some few human fallible credit rating agencies so much power when determining how much capital/equity banks had to hold against assets.

If asked about bank capital/equity requirements based on what’s perceived as risky being more dangerous to bank systems than what’s perceived as safe, Hayek could have probably asked: What were the large exposures that detonated bank crises built-up with, with assets perceived as risky or with assets perceived as safe?

The risk weighted bank capital requirements had a real purpose... quite different from making our banks safe

"I have been sitting here for most of these five days without being able to detect a single formula or word indicating that growth and credits are also a function of bank regulations"

I've often complained about the lack of purpose of the current bank regulations… until I finally understood that the risk weighted bank capital requirements decreed weights of 0% government - 100% citizens, revealed their real purpose, the empowerment of Bureaucracy Autocracies.

And don't take my word for it. Paul Volcker valiantly confessed: “Assets for which bank capital requirements were nonexistent, were what had the most political support; sovereign credits. A ‘leverage ratio’ discouraged holdings of low-return government securities”

What would America’s Founding Fathers opine about bank capital/equity requirements with decreed risk weights: 0% Federal Government and 100% We the People?

Financial Communism

The Federal Reserve’s largest credibility problem is that it lost its independence

Sir, I refer to your editorial “The Federal Reserve has a credibility problem” Washington Post December 16, 2022

All you write there is sure important and correct. But yet, sadly, real peccata minuta when compared to the Fed losing its independence.

Paul Volcker in his 2018 “Keeping at it” (page 148) explaining the risk weighted bank capital requirements, that which allow banks to leverage more or less their equity (their skin-in-the-game) writes (confesses): 

“The assets assigned the lowest risk, for which bank 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 shareholder and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities”

There with the “most political support”, the Fed clearly, if it ever had it, lost its independence.

What are American small businesses or entrepreneurs, those who because they are perceived as risky already get less credit and pay higher risk adjusted interest rates, to think of such regulatory subsidies handed out, in the Home of the Brave, to other “less-risky” access to bank credit competitors?

Volcker also states there: “Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011”

He is wrong, it's not “ironically” but just a natural consequence. All larger bank crises have always resulted from excessive bank exposures built-up with assets perceived as safe, never ever with what’s perceived as risky.

Before the debt ceiling is lifted, which it must be, Congress must dare to at least pose a question.

Note 1988: "Assets for which bank capital [equity] requirements were nonexistent, were what had the most political support; sovereign credits. A ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker

A letter in the Washington Post

Before the debt ceiling is lifted, which it must be, Congress must dare to at least pose a question.

In much of Peter Orszag’s Nov. 22 op-ed, “GOP threats to weaponize the debt limit are dangerous,” one can agree with his conclusion, but when he mentioned, “The evolution of debt is also influenced by the economy, market interest rates and other factors, but those are mostly outside the control of policymakers,” he omitted vital aspects. Let me explain it with a question:

What would the United States’ public debt be in the absence of regulatory subsidies, such as bank capital requirements with decreed risk weights of zero percent against federal government debts and 100 percent against citizens’ debts; copious amounts of Treasury purchases by the Fed with quantitative easing programs; and the preaching by modern monetary theory fans that has definitely promoted a dangerous lackadaisical attitude when discussing the limits of public debt?

Yes, Congress must approve increasing the debt level. It’s too late to do otherwise, but to do so without even trying to answer that question would be to irresponsibly kick the debt can forward and upward with disastrous consequences.

And, by the way, the Supreme Court should look at what the Founding Fathers might have thought about the aforementioned risk weights.

PS. The links displayed above are the ones placed on the web by the Washington Post

PS. Here’s a dialogue with ChatGPT about the moral hazard easy public debt causes. 

PS. The decreed risk weights 0% Federal Government - 100% We the People, seem clearly un-American. Have these been discussed and approved by the US Congress in accordance to the Constitution?

PS. Here’s a dialogue with ChatGPT about zombie nations.

In short: Regulatory subsidies, QEs and MMT preaching, allowed governments the very Easy Debt that generated the Easy Money which, for decades, has kept bureaucrats/politicians/apparatchiks living on Easy Street 

Déjà vu! Not the first time I warn about a crisis can being kicked forward. The 2007-2008 was.

My other letters published in the Washington Post related to this issue:

September 6, 2007: Factors in the Financial Storm
June 20, 2008: An Aspect of the Bubble
December 27, 2009: Another 'worst': Faulty bank regulation
January 6, 2012: Handcuffed by a triple-A rating
May 1, 2013: An American approach to banking
December 23, 2014: Let the market rule on risky trades
November 11, 2015: Reverse-mortgaging the future
August 9, 2016: Banks, regulators and risk
April 16, 2017: When banks play it too safe
July 11, 2018: There is another tariff war that is being dangerously ignored.
December 30, 2018: Affordable homes or investment assets?
April 18, 2020: The capacity to borrow at reasonable rates is a strategic sovereign asset