The “Stockholm Statement” by thirteen economists, including four former Chief Economists of the World Bank, is shamefully lacking.

The Stockholm Statement is shamefully lacking.

That is foremost so because chief economists of the World Bank, the world’s premier development bank, should know that risk-taking is the oxygen of any development; and should know that when banks were subjected to Basel Committee’s regulations, a distorting risk aversion was introduced.

To allow banks to hold less capital and therefore to leverage more their equity with what is ex-ante perceived, decreed or concocted as safe, than with what ex ante is perceived as risky; which allows banks to earn higher risk adjusted returns on equity on what’s “safe” than on what’s “risky” stops banks from financing the riskier future and cause these to settle on refinancing the “safer” past and present.

To force banks to hold more capital when lending to those perceived as risky, is a sure way to deny the weaker the opportunities of accessing bank credit and is therefore a decree to increase inequality.

To even suggest that the risk weighted capital requirements for banks is compatible with “leaving it to the market to do the rest” is as senseless as it gets. To argue: “The trend towards unfettered markets of the last quarter century explains a range of outcomes the world is now living with, including financial crises”, is not wanting to see what happened. Financial crisis are never caused by excessive exposures to what is ex ante perceived as risky; these are always the cause of unexpected events, criminal behavior or excessive exposures to what was ex ante perceived, decreed or concocted as safe… like AAA rated securities… like sovereigns like Greece.

Had this regulation introduced with the Basel Accord in 1988 been in place earlier, the world would have developed much less. Now perhaps these thirteen economists think that would have been better.

1997 in an Op-Ed I wrote: “If we insist in maintaining a defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, but presiding over the funeral of the economy. I would much prefer the regulators to put some blue jeans on and try to help to get the economy moving.” 

In April 2003, as an Executive Director of the World Bank I formally opined: "The Basel Committee dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In its drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth” 

Unfortunately no such external observer was ever present…. Worse the distortions these regulations produce in the allocation of bank credit to the real economy are not even discussed.

Stiglitz doesn’t understand that regulators, when doubling down on credit risk perceptions, are bullying those perceived as “risky”

Joseph E. Stiglitz together with George A. Akerlof and A. Michael Spence won the 2001 Nobel Prize in Economics "for their analyses of markets with asymmetric information". The Nobel Prize website indicates that in the case of Professor Stiglitz his contribution was to show “that asymmetric information can provide the key to understanding many observed market phenomena, including unemployment and credit rationing.”

In a 1998 paper by Thomas Hellmann and Joseph Stiglitz titled “Credit and equity rationing in markets with adverse selection” we read: "The meaning of rationing: “Those entrepreneurs who are willing to accept the higher price are rationed in the sense that they cannot obtain funds at the same price as other observationally identical entrepreneurs. Those entrepreneurs who are not willing to accept the higher price fail to receive funding in this market. Some of them may seek funding in the other market. If there is rationing in the other market too, they may fail to obtain any funding. Even if there is no rationing some of them may not find any acceptable offer in the other market, and again they are left without funding. The point is that while an outside observer may look at this environment and argue that there are many opportunities for the entrepreneur to obtain funding, it may well be that the funding that is still available comes at unacceptable terms, and the funding that has acceptable terms is rationed." 

And in his most recent book “Re-writing the rules of the American Economy” 2016, in the “Fix the Financial Sector”, Stiglitz writes “it is regrettable that almost all of the discussions of reforming the financial sector have focused on simply preventing harm on the rest of society and not in developing a financial system that actually serves our society- for instance by helping to effectively finance small business, education and housing”.

Yet in his very long and somewhat questionable what-to-do list, Stiglitz does not include getting rid of the pillar of current bank regulations, the risk-weighted capital requirements for banks, those by which regulators bully those who are usually perceived as risky borrowers.

By allowing banks to leverage more with what is safe than with what is risky, banks now earn higher risk-adjusted returns on equity when lending to the safe than when lending to the risky… with all its logical consequences.

I have read Professor’s Stiglitz cv. (boy!) and in it I find absolutely nothing that indicates he has ever walked on main-street. So most probably he therefore knows nothing about the difficulties of SMEs and entrepreneurs have to access bank credit. These borrowers, perceived as risky, quite often have to cheat, lie, or at least withhold the whole truth, or even bribe someone, in order to get the opportunity they believe can transform their lives and that of their children. 

And all those difficulties were present even before regulators told the banks that, besides clearing for ex-ante perceived credit risks by means of risk premiums and amounts of exposure, they also had to clear for the same perceived risks in the capital. 

One should expect someone that has won a Nobel Prize researching “credit rationing” to know that any perceived risk, an information, even if perfectly perceived, leads to the wrong conclusions, if excessively considered. But apparently it is not so.

The current risk weight of an unrated SME or entrepreneur, “We the people”, is 100%. The corresponding risk-weights for the Sovereign is 0%, for the members of the AAArisktocracy 20% and for the financing of houses 35%.

For instance the 100% for SMEs and the 35% for houses will cause we end up in houses without the jobs to pay the mortgages and utilities.

For instance the 0% for the sovereign and the 100% for We the People means that regulators believe government bureaucrats can use bank credit better than citizens... an outrageous statism.

Stiglitz has also aspired to a lot of fame as a champion against inequality… but, though he won the “John Kenneth Galbraith Award, American Agricultural Economics Association, August 2004” perhaps he should have included in his academic library John Kenneth Galbraith’s “Money: “whence it came, where it went” (1975). There on job creation and fighting inequality we read:

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created] 

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Professor Stiglitz was the Chairman in the Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System 2008 and 2009.

And, during the 2007 High-level Dialogue on Financing for Developing at the United Nations, from the perspective of the developing nations, I protested this regulatory risk aversion but no one really wanted to listen. 

And so when it all came down to the conclusions of the UN Conference Crisis & Development I suffered great disappointments.

I have said before and I repeat it again and again. Nobel Prizes should be recallable, especially if they are used for uttering opinions on matters the winners have no idea about… like bank regulations and Main Streets. Besserwissers from mutual-admiration-group-thinking-clubs monopolizing discussions, are just too costly for the future of our kids and grandchildren

How come Nobel Prize winning economists do not understand how regulators distort the allocation of bank credit?

Capital is invested in banks by shareholders looking to obtain the best risk adjusted returns on their equity.

Before current regulators concocted the credit risk weighted capital requirements for banks, the banks, without any sort of discriminations, gave credit to whoever offered them the highest risk adjusted margins.

But now, because of those requirements, more credit risk more capital – less risk less capital, banks can leverage their equity much more with what is perceived as safe than with what is perceived as risky; and can thereby earn much higher risk adjusted returns on equity when lending to the perceived safe than when lending to what is perceived as risky.

And of course, favoring the AAA rated and sovereigns, negates the fair access to bank credit to those perceived as risky, like SMEs and entrepreneurs, and so helps to weaken the economies and to increase the existing inequalities.

Just look at this: Basel II of June 2004 set the risk weight for AAA rated at 20 percent and allowed banks to leverage their equity over 60 times. But for unrated corporations the risk weight was set at 100 percent and in this case banks could only leverage about 12 times.

And all distortion for nothing, since absolutely all major bank crisis result from excessive exposures to something that ex ante was perceived as safe but that ex post turned out to be very risky.

But you read the comments on the 2007-08 crises by Nobel Prize winning research economists, like those of Joseph Stiglitz and Paul Krugman, and it is clear they have no idea about how the regulatory incentives distorted the allocation of bank credit. Unless they shut up for other reasons, like ideological ones, it would seem clear they never had the benefits of a decent Econ 101.

As for me, I strongly feel the Nobel Prize Committee, when the winners use the Nobel Prize reputation to opine in areas totally strange to them, should have the right to revoke Nobel Prizes, and ask for the prize money to be repaid.

Joseph Stiglitz: Until the world rids itself of distortionary bank regulations, The Great Malaise will continue.

Professor Joseph Stiglitz, in Project Syndicate and Social Europe, January 2016 writes “Why The Great Malaise Of The World Economy Continues In 2016”

And in it Stiglitz states: “While our banks are back to a reasonable state of health, they have demonstrated that they are not fit to fulfill their purpose. They excel in exploitation and market manipulation; but they have failed in their essential function of intermediation. Between long-term savers (for example, sovereign wealth funds and those saving for retirement) and long-term investment in infrastructure stands our short-sighted and dysfunctional financial sector.

“Short-sighted and dysfunctional financial sector”? Of course, how could it not be, when regulators impose odiously discriminating capita requirements for banks based on credit risk. That allows banks to leverage their equity much more with assets perceived or deemed to be "safe" (AAA rated) than with assets perceived as risky (SMEs); and which means banks make higher expected risk adjusted returns on equity with “safe” assets than with “risky” assets. That completely distorts the allocation of bank credit to the real economy. 

Why can a Professor Stiglitz scream out against market manipulation of banks and simultaneously keep total silence on the so much worse bank credit manipulations by regulators?

Why can a Professor Stiglitz scream out against fiscal austerity and simultaneously keep total silence on the so much worse bank credit austerity that is hitting the “risky” borrowers in the market, like SMEs and entrepreneurs.

Why can a Professor Stiglitz scream out against inequality and simultaneously keep total silence on that inequality driver capital requirements for banks based on credit risk signify?

Why cannot a Professor Stiglitz understand that if you want banks to “match long-term savings to long term needs” you are better off with capital requirements based on long term needs and not on short-termish credit risks?

Professor Stiglitz then opines “The obstacles the global economy faces are not rooted in economics, but in politics and ideology.”

Absolutely! When Stiglitz wants government bureaucrats to take advantage of that ultra low interests that in much result from favoring bank regulations, in order to finance new projects, he shows he is clearly rooted in politics and ideology. His being “Long live the technocrats and their technocratic approaches! They can do no wrong!”

I guess Professor Stiglitz was thrilled with the Basel Accord of 1988 that, for purposes of bank capital requirements, set the risk weight of sovereigns at zero percent and the risk weight of the private sector at 100 percent.

Where were Joseph Stiglitz and Paul Krugman when the Basel Committee decided to odiously discriminate against "the risky"?

We have Nobel Prize winners complaining, over and over again, about how de-regulated bankers messed up the world, without saying one iota about how it really was, with regulators who with their portfolio invariant credit risk-weighted equity requirements for banks, are all to blame for that.

Those bank regulators odiously discriminated in favor of those who already have more access to bank credit, namely the “infallible sovereigns” and the AAArisktocracy. 

Those regulators odiously discriminated against the fair access to bank credit of those we most need to have access to bank credit, like the "risky" small businesses and entrepreneurs. 

Many correctly argue that bankers should have to give back much of their bonuses, if in the medium and long term what they did did not work out alright. In the same vein there should perhaps be a claw-back clause on Nobel Prizes.

I am not sure Professor Stiglitz is a valid spokesman for the de-equalized.

Professor Joseph E. Stiglitz has written "The Price of Inequality: How Today’s Divided Society Endangers Our Future". 

Now, if Professor Stiglitz is so worried about inequality, as he should rightfully be, how come he does not care about one of the most important inequality drivers of our time, namely that of the capital requirements for banks based exclusively on the perceived risks of a borrower´s default, and where, of course, the “not-risky” are closely correlated to the haves, and the risky” to the not-haves? 

Professor Stiglitz chaired the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, which presented its final report in September 2009. In it we find no objection to this odious regulatory discrimination. 

I mean how can one not object a system which allows banks to lend to “infallible sovereigns”, those already obtaining the best conditions, against no capital at all, and at the same time require the banks to hold 8 percent in capital when lending, at high rates and low sums, to a sovereign rated BB+ or below? 

I mean how can one not object a system which allows banks to lend to the “infallible corporate”, those rated AAA to AA”, those already obtaining the best conditions, against only 1.6 percent in capital, and at the same time require the banks to hold 8 percent in capital when lending, at high interest rates and low amounts, to a corporate rated BBB+ or below, or to a small business or an entrepreneur? 

Is Stiglitz unaware that banks already discriminate for perceived risks by means of interest rates, amounts lend and other term, and so that this regulatory discrimination, placed on top of that, can only guarantee that banks overdose on perceived risks? 

Has Stiglitz never read Mark Twain describing bankers as those who lend you the umbrella when the sun shines but want it back, hurriedly, when it looks like it is going to rain? 

Can Stiglitz not understand the nature of the current crisis where our banks got saddled with obese bank exposures to what was, ex ante, officially perceived as absolutely not risky… like lousy securities disguised as splendid triple-A’s, loans to Icelandic banks, loans by the Spanish banks to the real estate sector in Spain, loans to an “infallible” Greek government, and other similar; and anorexic exposures to the “risky”, the small businesses and entrepreneurs, those we most need our banks to finance? 

And, because of all this, I am sorry, but for the time being, I am not sure Professor Stiglitz is a truly valid spokesman for the de-equalized.

A Nobel Prize recall

Frankly, any Nobel Prize winning economist, like Joseph Stiglitz, who is capable of defining over and over again a crisis resulting from excessive and obese bank exposures to what was officially perceived as absolutely not risky, as a demonstration of excessive risk-taking by the banks, should be asked to return his Nobel Prize.

What we first must do is to cut off the currently too visible hand!

Here we are, standing in front of the ruins of a horrendous financial crisis…

provoked by the most outrageous market intervention ever…

which occurred when bank regulators thinking themselves so brilliant…

concocted capital requirements for banks based on the risk of default as perceived by some few credit rating agencies…

like only 1.6 percent capital, which means allowing a 62.5 to 1 leverage, for anything related to an AAA rating…

and thereby rewarded additionally what was already rewarded by the traditionally coward capital markets….

to such an extent that the financial system stampeded toward safe-havens and turned these into dangerously overcrowded traps…

and now some have the gall to tell us it is “Time for a Visible Hand”

NO! What we first must do is to cut off the current too visible hand

The UN Conference Crisis & Development June 2009 - My Dissapointments

UN Conference Crisis & Development June 2009 Disappointments
Uploaded by PerKurowski. - News videos from around the world.

0:30 Millennium Development Goals

2:00 Risk weighted capital requirements for banks 

5:08 Polarization

6:25 Migrants in the world