Easy Money - Easy Street

By favoring banks financing the “safer” present, public debt and residential mortgages, over the “riskier” future, loans to small businesses and entrepreneurs, the regulators, generously assisted by central banks with abundant QE, and by the MMT preachers, provided the last generations loads of Easy Money, something which allowed these to live very happily on Easy Street. 

But, now it is all coming home to roost. Nations, needing more debts in order to service their current debts, are turning into zombies. 😢

Q. If we compare the economy to a human body, have not regulators, with risk weighted bank capital/equity requirements, imposed a lousy diet with way too much carbs and way too little proteins? Has that not produced dangerous obesity? 😡

Central banks and regulators should not be allowed to discriminate in favor of asset owners or those perceived or decreed as safe.

Again, I visited the Bank of England’s museum.

The silence about what’s happening to our banks as a consequence of the introduction of risk weighted capital requirements was still total.

Into my hands came a brochure titled “Quantitative easing explained: Putting more money into our economy to boost spending” It reads:

A direct cash injection: The Bank creates new money to buy assets from private sector institution’

Purchases of financial assets push up their price, as demand for those assets increases and corporate credit markets unblocked

Total wealth increases when higher asset prices make some people wealthier either directly or, for example, through pension funds.

My comment: “some people” this is a clear recognition that quantitative easing helps more those who own assets than those who don’t. Central banks should not be allowed to carry out such under the table non transparent discrimination.

The cost of borrowing reduces as higher asset prices mean lower yields, making it cheaper for households and businesses to finance spending.

My comment: Because of risk weighted bank capital requirements the benefits of any “lower yields” are primarily transmitted to those perceived or decreed as safe, for example, the sovereign and the beneficiaries of residential mortgages. 

More money means private sector institutions receive cash which they can spend on goods and services or other financial assets. Banks end up with more reserves as well as the money deposited with them.

Increased reserves mean banks can increase their lending to households and businesses, making it easier to finance spending.

My comment: Again, because of risk weighted bank capital requirements, banks increases in lending will primarily benefit those perceived or decreed as safe, for example, the sovereign and the beneficiaries of residential mortgages. 

My conclusion: Central banks should not be allowed to carry out such here confessed under the table non transparent discrimination in favor of those who own assets and those who generate lower capital requirements for banks. The combination of quantitative easing with the main transmission channel for monetary policy, bank credit, being distorted by risk weighted bank capital requirements has de facto introduced communism/crony capitalism into the financial sector.

My tweets asking very courteously bank regulators for an explanation

Dear bank regulators, please explain your current risk weighted capital requirements for banks against these four scenarios:

1. Ex ante perceived safe – ex post turns out safe - "Just what we thought!"
2. Ex ante perceived risky – ex post turns out safe - "What a pleasant surprise! That's why I am a good banker"
3. Ex ante perceived risky – ex post turns out risky - "That's why we only lent little and at high rates to it."
4. Ex ante perceived safe – ex post turns out risky - "Now what do we do? Call the Fed for a new QE?"

Because, as I see it, from this perspective, your 20% risk weights for the dangerous AAA rated, and 150% for the so innocous below BB- sounds as loony as it gets.

Here are some of my current explanations of why I believe the risk weighted capital requirements for banks are totally wrong.

And below an old homemade youtube, published September 2010, on this precise four scenarios issue

Why I distrust governments so much, and about which the World Bank and IMF could do a lot.

Sir, as a Venezuelan, I of course distrust completely any government that thinks it can manage, on behalf of its people, 97% of the country’s exports, better than what each citizen could manage his per capita share of the net revenues from those exports. 

But the following comment has to do with a completely different issue and that applies to many more countries than my own, namely: I entirely distrust governments that can allow bank regulators to do what they have done... Here's a short summary of it:

Without defining the purpose of the banks, in a way with which governments and We the People could agree on, the regulators decided that the only role of banks was not to fail. To be a safe mattress in which you could stash away cash. For instance, how they allocated credit to the real economy, did not matter. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

Then in order to keep banks from failing, without absolutely no empirical research on what makes banks and bank systems fail, they proceeded to impose credit risk weighted capital requirements on banks. More ex ante perceived risk more capital – less risk less capital.

Sheer lunacy! This seriously distorted the allocation of bank credit to the real economy, overpopulating “safe” havens like AAA rated securities and sovereigns like Greece, and for the real economy dangerously underexploring risky but perhaps productive bays, like SMEs.

These regulations, since implemented, have certainly hindered millions of SMEs and entreprenuers to have access to credit who otherwise would have been awarded by banks. No wonder QEs, fiscal deficits and low interests, fail to stimulate the economy.  Now banks finance “safe” basements where jobless kids can live with their parents, but not the risky SMEs, those that could create the jobs that could allow the kids to also become parents themselves.

And all for no good stability purpose at all. Just an example, the risk-weight for the dangerous AAA to AA rated corporate was set to 20%, while that for the absolutely innocuous below BB- rated was determined to be 150%. Motorcycles are clearly riskier than cars, which is why, having the choice of transport, so many more people die in car accidents. “May God defend me from my friends, I can defend myself from my enemies” Voltaire.

To top it up with these regulations the bank regulators helped to decree inequality

So World Bank and IMF, could I at least trust you to take up this with all finance ministers present during the meetings in October 2016? I have asked it of you many times before, but until now, nothing, zilch, nada.

PS. Here is a link to a somewhat expanded description of the horrors of the Basel Committee’s risk weighted capital requirements for banks.

Per Kurowski

@PerKurowski

A former Executive Director of the World Bank (2002-2004)

http://subprimeregulations.blogspot.com

http://perkurowski.blogspot.com

The way governments are cooking it perhaps we should all run to Panama, for our children and grandchildren’s sake.

Look at what government’s are doing.

The regulators set risk weights for public debt at zero percent, which means that the banks need to hold the least capital when lending to those who sort of appoint them, talk about a conflict of interest… talk about lobbying.

The central banks, with their QEs, buy mostly sovereign debt.

And the central banks with their negative interest rates benefit mostly governments, since who in his sane mind would lend to his neighbor at a negative rate?

So really, what do they need our taxes for?

But those who will surely have to pay for all this madness, will be our children and grandchildren, and so perhaps we, responsible fathers and grandfathers, should all be running to Panama and similar places to see what we can safeguard for them.

What Europe most needs, Europe does not get, courtesy of their bank regulators.

Where would that liquidity injected by the ECB’s QE printing machine best be put to use in Europe? Since there is a limit to how much you can inflate demand by inflating the value of existing assets, without any doubt, what Europe most needs now is for that liquidity to flow by means of bank credits to SMEs entrepreneurs and start-ups, those who stand the best chance of producing something new to advance the European economies. 

But no, that is not going to happen, not as long as Europe’s bank regulators, Mario Draghi, Stefan Ingves and Mark Carney included, have anything to say about it. 

Those regulators dangerously blocked the fair access to bank credit to anyone perceived as risky from a credit point of view, because they do not dare European banks take the risk of lending to these. That they have done by means of portfolio invariant credit-risk weighted equity requirements for banks. 

Those equity requirements work like hallucinogens on banks, intensifying their perception of credit risk, making what’s perceived as safe look much safer yet, and what is perceived as risky so much riskier.

It’s insane. It demonstrates the Basel Committee, Financial Stability Board, ECB, Mario Draghi and so many more are way over their heads in Europe.

Look at ECB, European banks, pension funds, widows and orphans, all scrambling in order to lay their hands on the ever smaller inventory of safe assets, those which by means of negative interests, are now so "absolutely safe" they already guarantee you a minimum haircut. 

ECB, swap the European sovereign bonds you acquired with QEs, for fresh bank equity in European private banks.

My heart goes out to the so many who are unemployed in Europe, as a direct consequence of banks not lending to SMEs and entrepreneurs, this a direct consequence of being required to hold much more of very scarce bank equity when doing so, than when lending to the “infallible sovereigns” or to the AAArisktocracy.

My heart goes out to pension funds, widows and orphans, who do not find a “safe” place for their investment and savings because, as a direct consequence of those same bank equity requirements, they must now compete with banks eager to access debt issued by the “infallible sovereigns” or by the AAArisktocracy.

And growth in Europe is so dismal that even those classified as “infallible sovereigns”, are offering negative rates, which of course is a “haircut”.

I have no idea whether it would be politically viable but, if I was the ECB, and or a government in Europe, the following is the proposal I would put on the table for its urgent discussion:

Assign the same 100% risk weight to all bank assets, so as to allow banks to allocate credit efficiently to the European real economies. 

That would signify an 8 percent equity requirement for all bank assets, which would open up a very significant need for new bank equity.

Let the ECB temporarily fill that hole by subscribing bank equity, paying with the sovereign bonds it has acquired as a consequence of QEs.

In due time ECB would resell those bank shares to the markets. While these shares are in possession of ECB, it will refrain from exercising any voting rights.

Banks can do whatever they want with those bonds… but since holding sovereign bonds would now require them to have 8 percent in equity we can safely assume they would resell these as well as other sovereign bonds they had, to pension funds and widows and orphans.

Banks would as a consequence immediately be able to look again at credit request from the tough "risky" risk takers Europe needs in order to have a future. Enough with not financing the future and just refinancing history J

Bankers, having then to service the dividend aspirations of much more equity, could of course see their bonuses slightly constrained J

And I guess that adequately capitalizing banks, is of some interest not only of those sovereigns in the periphery J

What would happen to current market value of bank shares? We do not know, but perhaps their dramatically increased safety would more than compensate for their much lower allowed leverage, and prices could even go up. Who knows, perhaps even pension funds, widows and orphans could become buyers of European bank shares J

Western world... listen!

God make us daring!

Or do like Chile did!

Is there a point at which a Nobel Prize must be recalled so as to avoid reputational and other damages?

How much can Nobel Prize winners be allowed to ignore facts relevant to what they are discussing?

Facts: 

1. The pillar of current bank regulations is the risk-weighted capital requirements for banks. 

2. These because regulators cannot differentiate between ex ante and ex post risks, allow banks to leverage their shareholder´s capital much higher when lending to “the infallible” than when lending to “the risky”. 

3. And that results in that banks can earn much higher risk-adjusted returns on their equity when lending to “the infallible” than when lending to the risky.

4. And that distorts and makes it impossible for medium and small businesses, entrepreneurs and start-ups to have access to bank credit in fair market conditions.

5. And that makes it impossible for the liquidity or stimulus provided by quantitative easing (QEs), fiscal deficits or low interest rates, to reach what needs most to be reached.

6. And all that for no good reason at all since bank crises are never ever the result of excessive exposures to what is ex ante perceived as risky.

And so when time and time again I read that a Nobel Prize winner asks for more economic stimulus and less austerity, without the slightest reference to the need of removing that huge regulatory boulder that stands in the way of job creation and sturdy economic growth, I can´t help but to ask… is there a point at which a Nobel Prize must be recalled so as to avoid reputational damage?

Of course I do understand the difficulties for the Committee for the Prize in Economic Sciences in Memory of Alfred Nobel. That prize was endowed by the Swedish central bank… and the current president of Sveriges Riksbank, Stefan Ingves, is also the current chairman of the Basel Committee, the committee responsible for creating the regulatory boulder that stands in our way... and that is a huge reputational risk in itself.

How dangerous it can be when reputational risks intertwine so much... in mutual admiration clubs.

  

Our slowing hybrid real economy is running out of gas... and is in a shutdown mode!

Our economy is like a hybrid car. It accelerates using a motor fueled by risk taking, and then, playing it safe, breaking, it draws energy which it stores in a battery that can be used to further move forward, for a while.

Unfortunately, with current perceived risk-weighted capital requirements for banks, banks are not financing the future, only refinancing the past… and so we are running only on batteries, risking running out of all risk-taking!

In other words, our real economy has been placed, by dumb regulators, in a real shutdown mode.

Four things the next Fed chair should absolutely know, and that the candidates most probably don’t know, yet.

The Fact: Current capital requirements for banks are much much lower for exposures to the “infallible sovereigns” and the AAAristocracy, than for exposures to small and medium businesses, entrepreneurs and start-ups.

The next Fed chair, whoever it is, should know that such different capital requirements for banks, based on perceived risks already cleared for by other means, produce different expected risk-adjusted returns on bank equity, and therefore completely distorts the process of allocating bank credit in the real economy, making it unreal.

The next Fed chair, whoever it is, should know that a financial transmission mechanism, when distorted as described above, stands no chance of producing a sturdy economic growth or generate sustainable employment. And, as a result, any quantitative easing becomes just a big waste.

The next Fed chair, whoever it is, should know that lower capital requirements for banks for what is perceived as “absolutely safe” than for what is perceived as “risky”, do not make any sense from a bank safety point of view. This is so because only exposures of the first kind can grow large enough to take the system down. And also because, when something ex-ante perceived as absolutely safe, ex-post turns out to be risky, as will happen sooner or later, then regulators will find the bank there with little or no capital at all.

The next Fed chair, whoever it is, should know that since banks need to hold much less capital when lending to the “infallible sovereign” than when lending to “risky” citizens, this translates into a subsidy of government borrowings, which means that current Treasury rates are not comparable to historical rates. In other words, the usual proxy for the risk-free rate is subsidized and distorted.

Democrats and Republicans… for the sake of America, agree at least on eliminating bank regulations which discriminate against "The Risky” and in favor of "The Infallible"

The access to bank credit has been rigged against those perceived as "risky", like small businesses and entrepreneurs, by means of requiring banks to hold much higher capital when lending to them compared with what the banks need to hold when lending to those perceived as “not risky”. 

This, in a country that became what it is, thanks to risk-taking, and which also likes to refer to itself proudly as “the land of the brave”, is a direct affront to the American courage and spirit of entrepreneurship.

This, is what most neutralizes the impact of fiscal and QEs stimulus, and which most stands in the way of job creation.

Why cannot Democrats and Republicans set aside their differences for one second, and agree on eliminating any bank regulations which discriminate against those perceived as “risky”? 

Would they do so, there would be no reason to concern themselves with a heightened risk in the financial sector, since never ever has a major bank crisis resulted from excessive exposure to those perceived as “risky” (consult your Mark Twain), these have always resulted from excessive exposures to what was ex ante erroneously considered as “absolutely-not-risky”.

Republicans could sell it to their side, correctly, as an elimination of regulatory distortions that impede the markets to efficiently allocate economic resources. 

Democrats could sell it to his side, also correctly, as an elimination of a discrimination against the “risky-not-haves” and in favor of the “not-risky-haves” which drives increased inequality.

Both parties need to understand that discriminating against "The Risky" and in favor of "The Infallible" is about as Un-American it gets... in fact it is outright immoral!

http://perkurowski.blogspot.com/2008/08/discrimination-based-on-financial.html

The fatidic black-swan explanation still keeps us in the crisis

When you restructure a company that has gotten itself into financial problems, you do not inject new funds before you have made the structural changes that allow you to reasonably expect that the company will recover, and so that you are not just throwing good money after bad. 

Unfortunately there has been no fundamental or significant restructuring carried out at all during the current crisis. And that is because so many bought into the fallacy of this crisis being caused by a “black swan” event, one which no one could foresee, and which therefore needed not to happen again. Bank regulators have of course been especially fond of this concept, as it reinforces their innocence.

But no! This was no black swan event. When regulators allowed the banks to hold immensely less capital for exposures considered as not risky, “The Infallible”, than for exposure considered “The Risky”, they virtually doomed the banks to originate dangerously excessive exposures to “The Infallible”, precisely the kind of exposures that have always detonated major crisis when, ex-post, these appear as very risky…. like triple-A rated securities backed with lousily awarded mortgages to the subprime sector, like Greece, like Spanish real estate… 

And so all bail outs, fiscal stimulus and quantitative easing done, without any fundamental structural change, like eliminating the capital requirements for banks which discriminate based on perceived risks, have just wasted preciously scarce fiscal and monetary policy space. 

When are our governments to wake up to the fact that those who messed it up were the not so white white-regulator-swans? And to the fact that the Basel regulatory paradigm is silly and sissy and must be thrown out the window... urgently?

Why is Ben Bernanke (and his bank regulating colleagues) so inconsistent?

Ben Bernanke, the Chairman of the Fed, in a recent speech at Jackson Hole, refers to the possible costs the “the possibility that the Federal Reserve could incur financial losses should interest rates rise to an unexpected extent”, as a result of its balance sheet policies. 

Bernanke diminishes that very real possibility by arguing: to the extent that monetary policy helps strengthen the economy and raise incomes, the benefits for the U.S. fiscal position would be substantial. 

In any case, this purely fiscal perspective is too narrow: Because Americans are workers and consumers as well as taxpayers, monetary policy can achieve the most for the country by focusing generally on improving economic performance rather than narrowly on possible gains or losses on the Federal Reserve's balance sheet. 

And I must then ask why on earth Bernanke is unable to apply that same reasoning to our banks? Is not the purpose of the banks also that of helping to improve the performance of the economy? 

The sad fact is that our banks are currently constrained, by means of capital requirements based on perceived risk, from lending to the small business and entrepreneurs, those that mean so much to the real economy, only because regulators like Bernanke, worried sick, have foolishly decided these borrowers are too risky for the banks, when compared to lending to the absolute safe, like the AAA rated and the infallible sovereigns. 

The consequence of that is that if a bank lends to a Solyndra, it is required to hold more capital that if it lends to the government, so that then a government bureaucrat can lend to a Solyndra. Frankly, a mind, if prone to believing in conspiracy theories, could not be blamed too much for suspecting that communism was being brought in, through the backdoor, by bank regulations. 

But setting aside any thoughts about foul play, what this regulations will create, and indeed have already created, are obese bank exposures to what is officially perceived as absolutely safe and anorexic exposures to the so needed and important “risky”. 

Bernanke ends by stating “The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.” 

Mr. Bernanke, let me then inform you that, in my humble opinion, because of your bank regulations, you and your colleagues are very much responsible for very much of that unemployment. Have you never thought of capital requirements for banks based on potential of job creation ratings?

Conclusion: The Milton Friedman helicopter approach, of dropping money from the sky, would be a much wiser approach for Ben Bernanke and the Fed to use than their QE’s, since that way, some funds at least, could reach the “risky”, like the small businesses and entrepreneurs, and not all get stuck with the officially perceived “absolutely safe”