Thursday, July 9, 2015

Just before the Berlin Wall felt, communists, statists, dictators and those who benefit from crony statism, gave the liberal capitalistic free-market world the finger.

In 1988, just before the fall of the Berlin Wall in 1989, some communists/statists hacked into the free market capitalist world’s bank regulations. By means of Basel I, and for the purpose of determining the capital requirements for banks, they arranged so that the risk weight for lending to OECD sovereigns was zero percent, the risk weight for lending secured with houses 50 percent, while the risk weight for lending to the private sector was set at 100 percent.

Since the basic capital requirement was set at 8 percent that meant that banks could leverage their capital unlimited times when lending to their sovereign, 25 times (100/4) when financing the purchase of houses and 12.5 times to 1 (100/8) when lending to the private sector, to the citizens.

That doomed bank to lend too much to the governments and too much to the housing sector, and basically to abandon the traditional role of banks, namely to provide credit for the private sector, like to SMEs and entrepreneurs. Of course those from the private sector that were exploiting crony statism, they just loved it. 

That de facto reflected the belief that government bureaucrats know better what to do with bank credit for which repayment they are not personally responsible for, than for instance e.g., small businesses and entrepreneurs.

And that in turn doomed the liberal free-market and capitalistic economies of the western world.

In a letter published by Financial Times in 2004 I wrote: "Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?

That the world is suffering under the thumb of neo-liberalism? That is just sad fake-news cover up invented by statists/communists.

How much public debt would have been avoided, or at least priced correctly if banks, when lending to the sovereign, needed to hold that same 8% they were required to hold when lending to the citizen?

Please, for the good of our grandchildren, it might already be too late for our children, help me tear down that wall the Basel Committee built… urgently … Greece was just the tip of the iceberg!

P.S. On that day, financial communism was decreed 

P.S. When 1988 regulators assigned America’s debt a 0.00% risk weight, its debt was $2.6 trillion, 50% GDP, now on route to $28 trillion, about 100% GDP, and it still has a 0.00% risk weight. When do you think that weight should increase to 0.001%?

PS. November 2019, there will be 30 years since the world went from “Tear Down that Wall” to the “Build Up that Wall” for 30 years.

PS. Here is an aide memoire on the mistakes in the risk weighted capital requirements for bank made so much worse with the introduction of Basel II in 2004.

PS. Here is the Confession (that shall not be heard) of a Regulatory Hit Man. The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages. Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011. The American 'overall leverage' approach had a disadvantage as well in the eyes of shareholders and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities." Paul A. Volcker, “Keeping at it” 2018.

A letter to the IMF titled: "The risk weights are to access to credit, what tariffs are to trade, only more pernicious."