Monday, October 18, 2021

But with questions that shall not to be heard, courage might not suffice

“A lot of people want to convince you that you need a Ph.D. or a law degree or dozens of hours of free time to read dense texts about critical theory to understand the woke movement and its worldview. You do not. You simply need to believe your own eyes and ears.”

Indeed: 

We should need nothing of that sort in order to understand that… risk weighted bank capital requirements based on that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe, is as wrong/as woke as can be.
2004, Basel II assigned to the safest of the perceived safe, a risk weight of 20% and, to the riskiest of the perceived risky, a risk weight of 150%... Translating into a Basel II capital requirement of 1.6.% for the safest and 12% for the riskiest... Meaning banks were allowed by their regulators to leverage their capital 62.5 with assets some few human fallible credit rating agencies consider to be the safest, and 8.3 times with what these agencies consider to be the riskiest.

We should need nothing of that sort in order to understand that… decreed risk weights of 0% the government and 100% citizens, de facto implies that bureaucrats know better what to do with credit for which repayment they’re not personally responsible for than e.g., small businesses and entrepreneurs. 
Should we agree with such statism/communism/fascism?

We should need nothing of that sort in order to understand that… allowing banks to leverage more their capital with some assets than others, make it easier for them to obtain a higher risk adjusted return on equity with some assets than with other. 
Should we agree with such in distortion of the allocation of bank credit?

We should need nothing of that sort in order to understand that… those less creditworthy already get less credit and pay higher interest rates.
Should we agree with bank regulations that declare the less creditworthy to also be less worthy of credit?

We should need nothing of that sort in order to understand that… … and on this issue I could go on and on… like wondering why the Academia says nothing. Might it be an Inquisition has declared questions on this issue shall not be heard?


PS. My 1999 Op-Ed in which, like Bari Weiss, I quote Arthur Koestler. “I automatically learned to classify all that is repugnant as an »inheritance from the past», and all that is attractive as the »seed of the future». With the aid of this automatic classification it was still possible for a European in 1932 to visit Russia and continue to be a communist.”

Wednesday, October 13, 2021

The confession of a regulatory hit man… one that shall not be heard.

Paul Volcker, in his autography “Keeping at it”, penned together with Christine Harper in 2018, wrote: “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… 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."

What does that mean? It means exactly, no way around it, that if banks needed to hold as much capital against government securities and residential mortgages than what they were required to hold against e.g., loans to small businesses and entrepreneurs, banks would either hold less governments securities or residential mortgages or require higher interest rates on that… which also translates into banks holding more loans to small businesses and entrepreneurs at lower interest rates.

Volcker referred therein to 1988 Basel I regulations’ risk weighted bank capital requirements, but that remains totally applicable to Basel II and Basel III.

Thirty-three years without free-market set interest rates in the Western world, and I believe not one single Nobel Prize in Economic Sciences winner, or reputable or disreputable PhD anywhere, or distinguished journalist, has referred to this. Could it be that risk weights 0% government, 40% residential mortgages have created such a strong alliance between statists/communists and home owners, that the 100% risk weighted citizens stand no chance.

With banks giving too much credit at too low rates to what’s perceived or decreed as safe, where do you think this will all end? Have a guess. 

“NOISE” defines me as noisy. I've got no problem with that.

Reading “Noise: A Flaw in Human Judgment" by Daniel Kahneman, Olivier Sibony and Cass R. Sunstein

Noise: “People who make judgments behave as if true value exists, regardless of whether it does. The think and act [as besserwissers] as if there were an invisible bull’s eye at which to aim, one that they and others should not miss by much”

Me: The Basel Committee’s risk weighted bank capital requirements, based on that what’s perceived as risky being more dangerous to our bank systems than what’s perceived (or decreed) as safe, is a pure and unabridged baseless judgment, held by Monday Morning Quarterbacks.


Noise: “Bias exist when most errors in a set of judgments are in the same direction”

Me: 2004, Basel II’s risk weights of 20% for what human fallible credit ratings agencies have assigned a AAA to AA rating, and 150% for assets assigned a below BB-rating, is clearly the previous judgement was set on steroids, by an ex-ante runaway risk aversion.


Noise: “Eliminating bias from a set of judgments will not eliminate all error. The errors that remain that remain when bias is removed are not shared. They are unwanted divergency of judgments, the unreliability of the measuring instrument we apply to reality. They are noise.” 

Me: So, I who for decades have been convinced of that what’s perceived (or decreed) as safe is much more dangerous to our bank system than what’s perceived as risky, seem to have been declared here, as pure unadulterated noise.

PS. Would Daniel Kahneman have been awarded the Nobel Memorial Prize in Economic Sciences if Sveriges Riksbank had known how much his 2011 “Thinking, fast and slow” helps explain how stupid their risk weighted bank capital requirements are?

P.S. After titling my book “Voice and Noise” I found an article by Ingo R. Titze, Ph.D., in the Journal of Singing titled “Noise in the Voice”. It argued “A little noise, turned on at the right time, can go a long way toward enlarging the interpretive tool”. It reassured me a lot.


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