If I knew absolutely nothing about bank regulations, I might also think like Thomas Piketty does in his "Capital in the Twenty-First Century"

What are the dynamics that drive the accumulation and distribution of capital? Asks the inside cover of Thomas Piketty’s “Capital”. And since just reading from the index shows that Piketty knows nothing about the earth shattering effect of silly bank regulations, or considers the effect of protections derived from intellectual property right, patents, and extravagant market shares, the question will, unfortunately, not be answered in this book.

Currently banks by means of lower capital requirements for what is perceived as “absolutely safe” than for what is perceived as “risky”, allow banks to earn much higher risk-adjusted returns on equity when lending to the safe than when lending to the risky… and anyone who knows how important risk taking is for keeping the real economy moving forward, will know how crazy that is… just like everyone who knows that all major bank crisis have always resulted from excessive exposures to what was perceived as “absolutely safe” and never ever for excessive exposures to what was perceived as “risky” will know, twice, how crazy that is.

To top it up, any book that proposes a tax on the 1% wealthy, without exploring why Chrystia Freeland’s .01% Plutocrats became especially wealthy, risks being a Trojan horse for these Plutocrats to accumulate even a bigger share of the wealth.

And so, I am sorry, “Capital in the Twenty-First Century” does not seem to me to stand on sufficiently stable ground.

And by the way, since the 1% wealthy have most of their fortunes in assets it is not clear how the sale of those assets are going to turn into a higher purchasing capacity of the poor, and if by luck that happens, how the poor are going to be able, avoiding the dilution by inflation, to satisfy their new needs at the grocery store.

Also, currently profits derived from intellectual property rights, like patents, and from extravagant market shares, are taxed at exactly the same rate as those profits derived from competing naked, with no protections, in the market. And since protected profits will always be higher than the unprotected ones, this means the protected will take over the unprotected… with dire results for western world capitalism, as we knew it.

PS. Walking around the museum Louvre in Paris, looking at all that art financed by the super wealthy and powerful, I stopped and asked myself: What would Thomas Piketty’s France exhibit at Louvre had there not been rampant wealth inequality? I mean I saw almost nothing an equal society in need of rational investments, would have been willing to finance. Life is not that clear-cut eh?

Could Thomas Piketty´s tax on 1% wealth, be a Trojan horse for Chrystia Freeland’s 0.01% Plutocrats to capture more wealth?

Today I heard at the World Bank Chrystia Freeland speak about her book “Plutocrats”... that I am now reading.

I asked her two question and some other remained unasked

First: Does the book analyze in any sort of depth, how much of Plutocrats wealth accumulation can be explained by intellectual property rights, patents? I ask this because I have argued that it is not good for capitalism, that the usually ample profits obtained under the protection of a patent (or the power of an extravagant market share) should be taxed at the same rate, than those more meager profits allowed by having to compete naked and unprotected in the market. And so the capital accumulation of “the protected” will be higher than that of “the unprotected”… with dire results in the long term.

Second: Since wealth accumulation by the Plutocrats are so often traced to market anomalies, known as rent-seeking and crony relations, could Thomas Piketty´s tax on the wealthy 1%, which he proposes in "Capital", be a Trojan horse for your 0.01% Plutocrats to increase the size of the cake that they are masters capturing?

One questions I did not have time to ask is… if you actually go after the wealth of the 1%, or even better that of the 0.01%, what would happen to their assets… who would be able to buy these? What would happen to the value of a $500 million Picasso? If it is the government, for instance by printing money, then we should be real careful because, as a Venezuelan, a country where 98% of all its exports goes straight into government coffers, I can guarantee you that government Plutocrats are much worse than the private Plutocrats who, at least for the time being, do not control all other powers.

The other question… or comment, will come later, in due time…because there is much which I do not agree with, in Freeland’s chapter on “Rent-seeking on Wall Street and in The City”. Basically it has to do with my vehement objection to the fact, so much ignored, that bank regulator’s pathological risk aversion, had them allowing banks to earn higher risk-adjusted returns on equity when lending to “the safe” than when lending to “the risky”. 

I do agree with her though that the Canadian bank regulator showed himself to be much wiser, by setting the capital requirements for banks more based on “the unexpected” than on “the expected”… that risk which should be taken care of directly by the banks.

PS. What a coincidence! Chrystia Freeland is the representative in the Canadian Parliament of where my Canadian grandchild lives. I informed Freeland that when my grandchild reached voting age, she could try to get her vote… and I would not object. Meanwhile, hands off, she is my constituency.

The regulatory destruction of the 1 plus the 99 percent

Chrystia Freeland begins her thought provoking “The self destruction of the 1 percent”, New York Times, October 13, describing how Venice became one of the richest cities:

“At the heart of its economy was the colleganza, a basic form of joint-stock company created to finance a single trade expedition. The brilliance of the colleganza was that it opened the economy to new entrants, allowing risk-taking entrepreneurs to share in the financial upside with the established businessmen who financed their merchant voyages.”

But then the wealthy closed up, with La Seratta, which sounds like a quite natural reaction from those who have more interest in defending what they’ve got than what they could get. And that began to hinder the opportunities for new entrants, and, of course, it all went downhill from there.

Yes, that certainly explains a lot of what happened, and much of a “La Seratta” is most certainly present in the USA, as it is in most other places where truly important fortunes or powers have been accumulated by some few plutocrats or some few of a party nomenklatura.

And, Freeland concludes her article with “The irony of the political rise of the plutocrats is that, like Venice’s oligarchs, they threaten the system that created them.”

But, to give you my own perspective on this issue, and on its possible relation to the current crisis which is indeed threatening all of us, most plutocrats included, I would like to ask:

What would have happened if a group of prominent Venetian bureaucrats, acting as colleganza regulators, in order to safeguard the investors, had decided to impose a tax on any venture perceived as risky, and pay a subsidy to any venture perceived as particularly safe?

The simple answer is that Venice would not have become one of the wealthiest cities, or, if already wealthy when these regulations were imposed, would not have remained a wealthy city, and this, no matter how much a L'Apertura reigned. 

What is now bringing down our economies, is precisely some truly loony bank regulations which, by their capital requirements and risk-weights based on ex-ante perceived risk, hugely favor the access to bank credit of “The Infallible” and thereby hugely discriminates against “The Risky”.

And that immoral discrimination gave the banks incentives to stay away from taking manageable risks on “The Risky”, like the small businesses and entrepreneurs, those who never ever caused a major bank crisis, and to instead take on unmanageable risks on “The Infallible”, like the AAA rated, real estate, or some “absolutely safe sovereigns”.

And here we are. Of course we need to control our plutocrats, but we also need to control our modern bank regulatory mandarins. I sincerely doubt they had to take a sufficiently rigorous Imperial Examination before they've got started; and neither can I understand who really authorized them to do what they did.