Monday, February 05, 2018

World Bank, more than a “Knowledge” bank, a “Besserwisser” bank, be the “Wisdom” bank I know you could be; or, if that sounds too haughty, at least aspire to be “The Common Sense” bank.

A “Knowledge” bank might think that assets perceived as risky could be risky for banks. A “Wisdom” bank understands that what could be especially risky for banks, and for bank systems, is what is perceived as safe.

A “Knowledge” bank might think that it is great for banks to avoid taking risks.

A “Wisdom” bank knows that the most important function for banks is to take intelligent risks on behalf of society.

A “Knowledge” bank might agree with the Basel Committee’s bank capital requirements based on perceived risks.

A “Wisdom” bank would think much more in terms of not distorting credit allocation, and, if that’s not possible, in terms of capital requirements for banks with a purpose, like on perceived chances of fostering human and natural capital wealth

A “Knowledge” bank, if it has to distort the allocation of bank credit, might agree with bank capital requirements against sovereigns based on credit ratings.

A “Wisdom” bank, in such a case, would much more prefer to base the bank capital requirements on a good governance index.

A “Knowledge” bank might say: “We know it all”. A “Wisdom” bank, would understand “We know Jack shit!”

Or, if aspiring to becoming the “Wisdom bank” sounds too haughty, the World Bank it should at least aspire to be “The Common Sense” bank.

Sunday, January 28, 2018

Many of our young will be without jobs, and will have to live in the basement of their parent’s houses, as a direct consequence of abominable bank regulations

Fact: The financing of house purchase is usually, with reason, perceived by bankers as much safer than financing entrepreneurs.

Fact: That means that, on their own, unregulated, banks would be expected to finance the purchase of houses more, and at lower risk adjusted interest rates, than financing entrepreneurs. 

Fact: But then bank regulators in 1988 doubled down on the same ex ante perceived risk and introduced risk weighted capital requirements. 

Fact: In those capital requirements (2004, Basel II) regulators assigned a much lower risk weight to the financing of houses (35%) than to the financing of entrepreneurs (100%).

This means regulators allow banks to hold less capital when financing the purchase of houses than when financing entrepreneurs. 

This means banks can now leverage their equity more when financing the purchase of houses than when financing entrepreneurs. 

This means banks can now obtain higher expected risk adjusted returns on equity when financing the purchase of houses than when financing entrepreneurs. 

This means that banks will even more prefer financing the purchase of houses, at even lower interest rates, than the financing of entrepreneurs.

This means easier, regulatory subsidized, access to house financing, causing higher house prices. How much of the easier  financing conditions when purchasing houses do we now have to finance when financing a house purchase?

This means a lesser, taxed by regulations, access to credit for entrepreneurs, causing less job creation and a slower growing real economy.

So, compared to what would be the case in the absence of these risk-weighted regulations this means:

For the young: Fewer possibilities of jobs and of buying their own houses. 

For house owners: They are sitting on assets that at current real valuations will not find buyers in the future.

For the aging: Lesser possibilities of taking care of their future needs.

For social peace: The young might revolt and shout: “Parents we’ve been cheated out of our future by crazy bank regulators, and you said nothing! So now you move down to the basements and we move upstairs!

Tuesday, January 23, 2018

Oxfam, how do you redistribute wealth already created, without risking making the poor poorer?

“The world’s billionaires – the richest 2,000 people on the planet – saw their wealth increase by a staggering $762 billion in just one year. That’s an average of $381 million apiece. If those billionaires had simply been content with staying at their 2016 wealth, and had given their one-year gains to the world’s poorest people instead, then extreme poverty would have been eradicated. Hell, they could have eradicated extreme poverty, at least in theory, by giving up just one seventh of their annual gains.”

That particular paragraph is spoken like a true redistribution profiteer 😞

First: Where do those “one-year gains” originate? If from criminal corruption, if from skewed central banks stimuli, if from exploiting monopoly and similar forces, then a reduction in that wealth increase would be absolutely justified and good… but, if that wealth increase came from true wealth creation, or even from heritage, then a reduction of it could have very negative consequences for all, especially for the poor.

Second: If that wealth has already been created and is consequently represented by assets, how does one liquidate those assets so as not to affect the value of those assets, or in other ways put markets at risk? One of those 2.000 billionaires is probably he who bought Leonardo da Vinci’s “Salvator Mundi” for $450 million. He, de facto, like with a sort of voluntary tax, froze $450 million of purchasing power on a wall, or in a safe box. How on earth does one go about to reconvert that into $450 million of new purchase power that could be handed over to the poor?

The Oxfam report contains many correct statements. I totally agree with that wealth should not be created by criminal and unfair behavior, or derived from crony statist relations; and I also agree with that wealth should not be used to abusively increase the influence of the wealthy in our societies.

But when the report states “To end extreme poverty, we must also end extreme wealth” I disagree. First because whether one likes it or not, wealth, as it is invested in assets, has de facto already been redistributed… like in the previous case to those who received the $450 million paid for the “Salvator Mundi”… to those who sell a luxury yacht… to those who sell handmade shoes in Milan… to governments by buying public debt… to markets by buying shares.

On the report Jeffrey Sachs comments: “Sometimes the super-rich call out Oxfam and others for ‘stoking class warfare’ but the truth is that in many societies, including my own, the United States, many of the super- rich have in effect declared war on the poor.”

That sounds precisely like what Chavez preached and now Maduro does in my Venezuela… and look where that has taken our poor country… with asset values and salaries totally destroyed over some very few years… a whole generation of Venezuelans growing up severely malnourished… and the Bolivarian revolutionaries blaming it all on the war declared on them by The Empire. 

Oxfam, a multinational confederation of NGOs, having issued this report, has now a moral obligation of explaining, once wealth has been created, how it can be redistributed without running the risks of making the poorest poorer.

Expropriate it! 

Wednesday, January 10, 2018

About Zamorano and the use of country systems

I posted this because today World Economic Forum @wef posted a tweet that said "Denmark is building a school where students have to grow their own food". I already saw such a school, way back, in Honduras, in Zamorano.

This is a copy of an informal memo sent to my colleagues Executive Directors at the World Bank in 2004, as extracted from my Voice and Noise of 2006.

About Zamorano and the use of country systems

Dear colleagues,

Traveling in Honduras recently, I heard on the radio the old rock band Enanitos Verdes singing about having to run the risk of getting up, in order to keep on falling, and it reminded me of our recent discussions about “use-of-country-systems” where I gave you my mumbo jumbo about having to let them go, since this is the only way they could learn how to ride a bike. 

I was on my way to visit the agricultural school Zamorano, cajoled (with no major effort needed) by one of its graduates—a friend of ours, Jorge Wong, and little did I know I was heading into true learning-how-to-bike land. The motto of this most amazing school is “learning while doing” and … Boy, do they! Boy, do they learn!

In Zamorano, kids have a school year of 11 months and are rigorously awakened every morning at 5 am—hellish but I tell you that it has been a long time since I’ve seen such a group of enthusiastic, happy, and feeling-good-about-the-future young faces. There are about eight hundred boarding students, of whom more than two hundred are girls. They come from many Latin American countries, from all backgrounds, and any differences are neutralized with education, companionship, and uniforms. 

Along with their formal academic classroom studies, the kids, from seventeen to twenty-three, are taught about every imaginable (and also some you-do-not-want-to-imagine) agricultural and farm chore there is, by being handled full responsibility for doing them. They grow crops, milk cows and in the industrial installations where they produce cheeses, juices, marmalades, sausages, and much more that they sell in Honduran supermarkets, the managers are the students from senior grades and the workers their younger friends. 

And Zamorano goes way beyond teaching knowledge. When I heard some kids explain to me about the biologic pesticides they develop and market all over Central America, could it be to make it the “Green Subcontinent”? It became clear that besides algebra, they must have gotten lectures on confidence building, communication skills, and character formation too.

Although I was told that in the dry season the landscape changes somewhat, El Zamorano as I saw it lay snuggled in a beautiful valley, where it has about 10,000 acres of land and great and functional facilities. This Zamorano seed effort is more than ready for some heavy-duty scaling-up, and they have already started doing so with some interesting and substantial extension programs, reaching out to their neighboring communities. Envying their tremendous educational expertise, I am already on my knees, begging them to branch out into my favorite Central American growth program—you bet, those who know me: educating doctors specialized in geriatric ailments and bilingual nurses, certified by schools and health authorities of developed nations.

In the last couple of weeks we have been reminded of some of Ronald Reagan’s “one-liners” (slogans), among them, “trust but verify.” It is clear that we face serious challenges when monitoring or verifying the results of our projects, but, frankly, after having been in Zamorano, I am convinced that it is exactly in the trusting department where we really are in the backwaters. We need not worry, though. Zamorano was founded three years before the World Bank, and so we still have a chance to catch up. 

Back in D.C., on my radio, Joan Manuel Serrat was singing about Africa—something about the world not letting it go, yet not holding onto it.

Tuesday, January 09, 2018

Here is a fact Washington should consider before, inhumanly, sending Salvadorans packing, after using them for so long.

Snowing in Washington

Yes, it had snowed a little, but never would I have imagined when I arrived for an early-morning conference at the World Bank that I would find the meeting had been suspended because of “inclement weather.” Later I came to understand. Just a minimum amount of snow creates total havoc in Washington. The snow covers the streets for days and except for those few corners that are shoveled clean by some tropical Salvadoran saviors living up to their name, it will have to melt away either through warmth or tons of salt. The schools also shut down for any little flurry and although the news of this is received with great joy by all children, my daughter first among them, but nonetheless of course, not braving it will only make it harder for Washingtonians to conquer their weakness through Darwinian evolution. Indeed, Washington is a great and beautiful city and although it is the capital of the world’s mightiest nation it has also its Achilles’ heel. It could be completely shut down with just a couple of strategically located snowmakers.

Thursday, December 28, 2017

Bank regulators’ statist 0% risk weight of sovereign, turn governments into credit spoiled filthy-rich brats that will end up defaulting

If banks need to hold much less capital when lending to the sovereign than when lending to anyone else; and thereby makes it easier for the sovereign to offer banks an attractive risk adjusted return, banks will lend and governments will borrow, way too much. It is doomed to end badly.

That is what the 0% risk weight of sovereign when setting the capital requirements does. It is a shameless and dangerous regulatory subsidy of government debt which statist regulators justify based on “sovereigns can always print money”, which as we all know is precisely one of the major risks with sovereigns.

And too many experts, most, are not even aware of that regulatory subsidy, and often refer to government debt setting the risk-free rate, as if nothing had happened.

For instance, way to often we read a reputable financial commentator opining that the sovereign should take advantage of the very low rates in order to take on some needed infrastructure projects that will also provide jobs while they last. No consideration at all is given to the fact that government debt, if it does not help generate the economic growth required for its repayment is a de facto tax on future generations. Those who seem to be most in need of tax-cuts are the unborn. Why not think of them too President Trump?

What would happen if we want to retire our deposits in a bank that is overextended in loans to an overextended sovereign? Have the sovereign print money? Like any Venezuelan central bank?

This 0% risk weighting started in 1988 with the Basel Accord. During the almost 600 years of previous banking there was nothing of that sort of distortion. Imagine what financier Templar Grand Master Jacques de Molay, burned in 1307 by Phillip IV, would have to say about that 0% risk-weight. 

But what to we do now? If we imposed on banks the same capital requirements for lending to the sovereign than when lending to the citizen, which is how it should be in order for banks to allocate credit efficiently, that would create so large new capital requirements it could bring the whole ordinary bank credit function to a halt.

Let us suppose we want banks to hold 10% in capital against all assets. One alternative would be to lower the current capital requirement for banks to each banks’ current average capital, and let it thereafter build up little by little… with no dividends for quite sometime.

Another, more effective, one I would prefer thinking of my grandchildren, is a haircut on all bank depositors, by forcing them receive some negotiable non redeemable bank shares in lieu of money.   (As a payment for the basic minimum deposit guaranty?) Perhaps those shares could even turn out to be a good investment for pension funds.

What Kurowski? Have you gone mad? No friends, just tell me how we otherwise stop governments, egged on by so many redistribution profiteers, from taking on subsidized debt?

PS. The other sector that is being subsidized by low risk weights is that of residential mortgages. That will likewise signify we end up with plenty of houses for our children to live in the basements, but too few jobs for them to be able to buy their own upstairs.

PS. In 1988 the US debt was USA’s was $2.6 trillion. At the end of 2017 it was US$20.2 trillion, and it is still 0% risk weighted.

Friday, December 22, 2017

Before going after the “filthy-rich”, it behooves us all to consider how they got their wealth and what they have done with it.

The plutocrats can have obtained their wealth in many forms ranging from highly licit and commendable ways that have even enriched many others, to odiously having used criminal means leaving many impoverished in their wake. But, once that wealth exists, what can the wealthy do with it?

They can invest their wealth in bonds and shares, which mean these assets, if well invested, will be productive.

They can freeze their purchasing power, by a sort of voluntary tax, on walls or in storage rooms, like for instance the $450 million Leonardo da Vinci “Salvator Mundi” (What those who got the $450 million fresh purchase power do with it, is what then becomes relevant to the economy) 

They can spend their wealth on things that no normal human being could spend on, which helps to create jobs than would otherwise not exist.

They can put some cash, on which they earn 0%, under the mattress... a couple of $100 bills?

They can engage in philanthropy, hopefully efficiently in worthy causes, otherwise that's a loss.

They can use their wealth to manipulate and exert undue influence.

That should primarily make us go after that wealth that has been obtained through illicit or immoral means; and that wealth that is used to manipulate and obtain more influence than what its owner should rightly have; and keep an eye out for useless and even bad philanthropy.

I argue all this because, when redistribution profiteers try to increase their franchise value by instigating envy and hate, it behooves the rest of us to make a clear distinction between the good and the bad among the astronomically wealthy; and to much better understand what has already been "redistributed" by the wealthy themselves, so as to avoid unexpected consequences.

What is absolutely certain though is that any redistribution of wealth will yield only a minuscule fraction of the benefits so loudly promised.

PS. There are though many market inefficiencies that allow wealth to be accumulated in legal and moral ways but that should anyhow be combated. This includes monopolies or excessive rent extraction from intellectual property rights.

Saturday, December 09, 2017

How can we, the 99.99%, in order avoid suffering the tragic consequences of any awful leveling events, coexist in a friendly and mutually beneficial way with the extremely wealthy 0.01%?

Edoardo Campanella reviews five books debating “the growing wealth gap between a narrow upper class and the rest of the human population” that which he argues may be the greatest economic challenge of our time. “Inequality and the Coming Storm” Project Syndicate, December 8. 

The books reviewed are: The Great Leveler, by Stanford University historian Walter Scheidel; Global Inequality, by CUNY economist Branko Milanovic; The Vanishing Middle Class, by MIT economist Peter Temin; The Broken Ladder, by University of North Carolina at Chapel Hill psychologist Keith Payne; and Plutocrats, by the former journalist and current Canadian Minister of Foreign Affairs Chrystia Freeland.

There are many origins of that wealth that feeds inequality, some abominable and odious, like crime and corruption, other, like Chrystia Freeland writes, “built their fortunes through hard work, talent, and discipline. But, once that wealth has been created, it can be destroyed by what Walter Scheidel calls the “Four Horsemen of Leveling”, exemplified by “the twentieth-century world wars, the Russian and Chinese Revolutions, the fall of the Roman Empire, and the Black Death, respectively. 

Surely the consequences of such horrendous levelers, especially for the much more numerous poor, cannot justify us ever wanting to get rid of inequalities that way… that is except if we have a need of a schadenfreude with masochistic characteristics. 

When Scheidel argues, “all societies eventually reach the level of inequality they can tolerate. Once this pain threshold is breached… Only carnage, chaos, and destruction can restore fairness in the system… extreme inequality yields only to extreme equalizers” our first and only concern should be, how on earth can we learn to live well and prosper in a world of runaway inequalities? 

Campanella, seemingly agreeing on that goal writes: “What can be done? Many commentators recommend improving the availability and quality of public education. Others have proposed more effective ways to tax wealth, such as a global tax on capital income, higher marginal tax rates, more aggressive estate taxes, or even a tax on robots. And still others are calling for a universal basic income (UBI).”

But Campanella is no optimist… “none of these will be a panacea. Educational policies take years to gain traction; taxing the global super-rich would require a level of international cooperation that does not exist today; and a UBI is simply unaffordable for most – if not all – governments.”

I instead, hopefully since I see no other remedy, think we do have a chance to coexist in a friendly and mutually beneficially manner with the unbelievable wealthy. But for that to happen there are some requisites:

1. We appreciate what inequality might produce. For instance when Campanella writes “Most of the great temples, royal palaces, pyramids, castles, and other monuments of history are the lasting evidence of past wealth disparities”, we should immediately ask ourselves whether those monuments would have existed at all without rampant inequality and, if our answer is no, would the world have been a better world for all of us? 

In this respect I had a wake up experience a couple of years ago when reflecting on a beautiful richly adorned but totally useless shield at the Museum of Louvre, it dawned upon me that most of it would not exist were it not for immense inequality. I suspect that Thomas Piketty, as a Frenchman, would not want to have sacrificed Louvre either, in the name of some unknown equality…we know the inequality we have.

2. We begin to understand that much of the wealth that exists cannot just be redistributed without the possibility of serious unexpected consequences. For instance what harm can it do that one person has now decided to freeze on a wall, with a sort of voluntary tax, US$450 million of his main-street purchase capacity, in Leonardo da Vinci’s Salvator Mundi? If anything we should go after those who got the US$450 million and see what they do with it… and if they pay their taxes. Those US$450 million on the wall should also help to raise expectations about the value of art, which might lead to some thousands of painters getting a dollar or more for their paintings, something which though it might not decrease inequality much, would in general be very good. (Disclosure, my daughter is an art consultant J)

3. We fully comprehend that all that wealth that, if it were ours, would surely help us to solve many of our daily problems, does not really guarantee its current owners one iota more of happiness.

4. We fight against all that hinders opportunities, like the risk weighted capital requirements for banks with which regulators have basically decreed inequality. In the same vein we need to combat all criminal or unproductive accumulation of wealth, like that obtained by means of corruption or the excessive exploitation of monopoly elements. 

5. And finally (especially as a Venezuelan) we have to fight tooth and nail against all the redistribution profiteers, those who instigate envy and class hatred only in order become themselves the neo-Plutocrats.

PS. And though for much more than reducing inequality, I do believe in a Universal Basic Income.

Wednesday, December 06, 2017

More important than affordable houses for the young, is for them to afford houses.

A letter sent to The Globe and Mail (not published)

The Inter-American Commission of Human Rights (IACHR) has joined UN Rapporteur in recognizing Canadian Human Rights-Based Approach to Housing. When it refers to the creation of safe and affordable housing during the next 10 years for the Canadian population most in need, such as women and children fleeing family violence, seniors, persons with disabilities, those dealing with mental health and addiction issues and veterans, I cannot but concur.

But, it also makes reference to “young adults” and, in this, as a grandfather of two Canadian girls, I must raise my hand to argue that much more important than allowing the young adults affordable housing, is allowing them to afford houses.

Currently, because banks are allowed to leverage more with “safe” residential mortgages than with loans to the “risky” entrepreneurs who stand a better chance to create the future jobs our young need; and banks therefore earn higher risk adjusted returns on equity with mortgages than with loans to entrepreneurs, Canada, like all countries using the Basel Committee’s risk weighted capital requirements for banks, has put the horse before the cart.

PS. Not sent to The Globe and Mail: What would the price of a house be if there was no financing available to purchase these? Of their current price how much is represented by the intrinsic value of the house, and how much is a reflection of all one-way-or-another subsidized financing allocated to that sector? The sad truth is that our society has ended up financing the financing of houses. When all that low risk weighted mortgaging comes home to roost in a subprime unproductive economy, it will be hellish

PS. Chinese money: What’s the problem with Chinese freezing some of their wealth in Canadian real estate? What’s important is what those selling that real estate do with the money. Or not?

Research project: How much in the current house prices can be attributed to the market having priced in all preferential treatments the society has awarded the financing of houses… like the low risk weights in the risk weighted capital requirements for banks?


Saturday, December 02, 2017

Fiscal waste's decades out

Some want tax cuts.
Some wants tax increases
But no one want tax spending cuts
So its the fiscal waste's decades out

But why worry when it is so easy to finance it with QEs, low interest rates and regulatory subsidies.

Regulatory subsidies? 

Tuesday, November 28, 2017

Those bothering us and wasting our limited and valuable attention span on social media should not be able to do so at a zero marginal cost.

Those who on social media send us their advertisements, surely pay Google and Facebook the most, if we respond to their ads. In that sense all those players have a vested interest in targeting us as good as they can. 

But if they do not target us adequately, the marginal cost of that for them is zero.

And that is not good for us. That because we the ad-recipients have to pay the cost of using up too much of our limited attention span on ads, info and fake news we do not really need.

So therefore if all who we have not directly designated as friends, had to pay us something for contacting us on social media; like a one hundred of a $ cent, I am sure the Google and Facebook would be a bit more concerned about not wasting our time... and would then target us even better.

Nowadays they generously allow us to message them with an “I am not interested”. But, is that just not too late? We have already been bothered and since there are millions of vendors out there, I would hate to look forward to a future of having to waste years of my life sending “I am not interested” replies.

PS. Although sometimes we should not ignore it could be of much benefit to us to be targeted by something outside our comfort zone, so as to avoid incestuous intellectual degeneration. 

Sunday, November 19, 2017

Those absolutely no good at something, lack exactly the skill they need to know that they are no good at it. John Cleese dixit.

Monty Phyton’s John Cleese, fabulously interviewed at the Commonwealth Club by Adam Savage, the host of “Mythbusters”, and in reference to a theory by David Dunning, a professor at Cornell, says around minute 57:40 the following:

“In order to know how good you are at something requires almost exactly the same aptitude as it does to be good at that think in the first place.

Which follows, as a corollary, that if you absolutely no good at something, you lack exactly the skill that you need to know that you are no good at it.

And once you realize that, you see there are thousand of people out there that have absolutely no idea of what they are doing, and so they have absolutely no idea of that they have no idea what they’re doing.”

I wonder, could John Cleese by any chance be referring to those regulators who, when deciding on the risk weighted capital requirements for banks, assigned a meager 20% to those dangerously rated AAA, and a whopping 150% for those who rated below BB- have been made so innocous for the banking system?

Here some personal observations on those cuckoo risk weighted capital requirements for banks developed by the Basel Committee, for the world to use, God Help Us!

Saturday, November 18, 2017

Could this be a theme that for some strange reason TED Talks does not like me to talk about?

How long should we allow bank regulators, like the Basel Committee for Banking Supervision and the Financial Stability Board, to feed us their dangerous and hubris filled besserwisser bullshit?

How can any system that makes it easier for those who already have it easier to access bank credit, and harder for those who already find that harder be defined as a “fairer financial system”?

How can any system that risk weights with 20% the so dangerous AAA rated, and with 150% the so innocous below BB- rated, be defined as a system that fosters financial stability?

How can any regulator who does not care about the purpose of what he is regulating hold that he knows what he is doing? “A ship in harbor is safe, but that is not what ships are for”, John A Shedd

How can any regulator allowing banks to leverage their equity different with different assets and not understanding or caring about how that distorts the allocation of bank credit to the real economy, hold that he knows what he is doing?

How many more houses built because its financing is risk weighted 35%, will have its basements occupied by unemployed children, because the risk weight for unrated SMEs and entrepreneurs is 100%?

Friday, November 17, 2017

Is freezing at Christies US$ 450 million in purchasing capacity in Leonardo Da Vinci’s Salvator Mundi something good or something bad?

Clearly Leonardo da Vinci has to personally, from above, be extending his deepest gratitude to Janet Yellen of the Federal Reserve and Mario Draghi of the European Central Bank. Had it not been for their quantitative easing (QEs) and ultra low interest rates, he would never ever have seen his Salvator Mundi valued, so soon, at an incredible US$ 450 million.

Of course the wealth redistribution profiteers will scream bloody murder. The US$ 450 millions is like a voluntary tax that has escaped their franchise. 

The real question though is: Was the freezing of US$ 450 million in purchasing capacity in a painting (or in a storage room), like with a sort of voluntary tax, something good, or something bad. If bad how do you reverse it without other negative unexpected consequences?

But, for the time being, what is much more interesting is what are the vendors to do with US$ 450 millions in cash?

Saturday, November 11, 2017

Who nudged regulators into using stupid and dangerous risk-weighted capital requirements for banks? The bankers?

Banks not capable of perceiving risks correctly, or not adjusting to perceived risks correctly, with size of exposure and adequate risk-premiums, should fail as fast as possible.

Banks capable of perceiving risks correctly, and to adjust to these correctly with size of exposure and adequate risk-premiums, would in fact not need to hold any capital.

Unfortunately, since banks could belong to the first group, and there is also the risk of unexpected events that could affect even the best of banks, regulators need to require banks to hold some capital.

Curiously, unfortunately, bank regulators, with the Basel Accord of 1988 introduced risk weighted capital requirements. These spelled out more risk more capital, less risk less capital. 

Though at first sight that might all sound quite logical, in terms of searching for more financial stability it makes no sense whatsoever, as what’s perceived as risky poses by just that fact alone less danger to the banks. It is what is perceived as safe than can cause banks to create excessive exposures, which if these later turn out risky could put a whole bank system in danger. 

To top it up it the risk weighting translates into allowing banks to leverage differently different assets, thereby producing different risk adjusted returns on equity than what would have been the case in the absence of this regulations, and so it introduced a serious distortion in the allocation of bank credit that is affecting the real economy.

Who could have nudged regulators to do so? Since being able to earn the highest risk adjusted returns on equity on what is perceived as safe sounds like a wet dream come true for bankers, I have my suspicions.

PS. Here an aide-mémoire on the principal mistakes of risk weighted capital requirements

Tuesday, October 31, 2017

OAS-IACHR, dare opine on economic violations against human rights

The Charter of the Organization of American States establishes among its principles that "the elimination of poverty ... is the common and shared responsibility of the American States (Art: 3f)… And also to “devote their utmost efforts ... to achieve equitable distribution of national income”; (Art. 34.b)

The American Convention on Human Rights (1969) states (Art: 26) that "States parties undertake to ... achieving progressively the full realization of the rights implicit in the economic, social and educational, scientific and cultural standards set forth in the Charter of the OAS ... to the extent of available resources, through legislation or other appropriate means ".

And in the case of "Discharged and Retired Employees of the Comptroller vs. Peru" (2009) case law has been established, when in the judgment we read that the Commission on Human Rights "is competent to decide whether the State has committed a violation or breach ach of any of the rights recognized in the Convention, including with regard to Article 26 of the same ".

OAS has yet to define though what it means with a violation or breach of economic, social and educational, scientific and cultural standards. That is sad. Had it done so, much unnecessary human suffering could have been avoided.

For instance there are some economic policies or economic crimes that causes such harm to so many humans, so as these should classify as punishable violations against human rights.

I can think of corruption; of loony foreign exchange systems; of runaway monetary policies causing hyperinflation… and of course, of Venezuela’s domestic gas prices.

In the international market gas is sold at about $1.60 per gallon, in Norway, another oil country, it is sold domestically at US$ 8.40 per gallon, and in Venezuela, where people are dying because of lack of food and medicines, it is given away, at US$ 1 cent per gallon.

In Venezuela this horror is not discussed. The political price for proposing to correct it is perceived way too high by both those in government as by those in the opposition.

If gas were sold there at the price it could fetch in international markets, the reduction in the demand would allow much more gas to be exported, and much more food and medicines to be imported.

Would the prices be even higher, and all new revenues shared out directly among Venezuelans, then the incentives in the fights against inequality and against climate change would even be aligned.

So, can you imagine how much more sanity could prevail if the Inter American Commission of Human Rights declared gas giveaways to be a violation of human rights; something which could cause anyone directly responsible for such criminal policy to be hauled in front of an International Court of Human Rights… or even just in front of a local judge?

I tried to do something about this in 2009. No chance! I denounced this to OAS’ IACHR or OEA’s CIDH in July 2015. I am still waiting for a response.

Can somebody lend me a hand?

PS. December 2017: If gasoline was sold in Venezuela at current world market prices (0% tax) then between eliminating its smuggling and reducing its local demand, one could easily obtain US 10 million a day. At US$2 per day, that would help feed five million people, one sixth of Venezuela’s population.


Sunday, October 22, 2017

Like sales taxes are considered regressive, aren’t corporate taxes too?

Sales taxes are considered regressive because they take a larger percentage of income from low-income taxpayers than from high-income taxpayers.

Does that not apply equally to corporate taxes? I mean they tax income that is going to poorer shareholders with fewer shares with the same rate they tax the income of those with millions of shares?

But then again that might just be me hating corporate taxes, since I believe that the only ones to should pay taxes to the government are we the citizens… so that governments have no doubt about who they work for.

Wednesday, October 11, 2017

World Bank, please dare tackle the issue of what could be considered punishable economic crimes against humanity

Could we challenge the World Bank, as the world’s premier development bank, to put on its agenda to try to qualify which economic policies could be so egregious so as to qualify as punishable economic crimes against humanity?

For instance in a country where people are dying for lack of food and medicines, could selling gas at less than US$ 1 cent per gallon be such a crime?

An Executive Director of the World Bank answered me with: “We already name and shame those who engage in outrageous subsidies of fuel”

That is good, but far from enough! That the World Bank names and shames, is sometimes in some shady circles even taken as evidence of good behavior. No, I am referring to the possibility of having an energy minister face charges in the International Court of Justice in Hague.

Tuesday, October 10, 2017

If one were to construe a systemic risk that could bring bank systems down, this is one way

First: Make capital requirements for banks based on perceived risk. More risk more capital, less risk less capital. That would allow banks to leverage more with The Safe than with The Risky. That would allow banks to earn higher risk adjusted returns on equity lending to The Safe than when lending to The Risky.

Second: Allow banks to use their own risk models to decide what is risky and what is safe and therefore how much capital it needs. Alternatively allow some very few human fallible credit rating agencies to decide what is safe and what is risky.

Third: Sit down and wait for banks lending too much against too little capital to The Safe, like sovereigns, the AAArisktocracy and mortgages; within an economy weakened by too little lending to The Risky, like to SMEs and entrepreneurs.

But, oops, hold it there! Someone already did that! I think it was the Basel Committee for Banking Supervision.

Thursday, October 05, 2017

Who should lead the Fed? There’s one initial and essential screening of the candidates.

Fact: Banks are allowed to leverage more with assets considered safe, like loans to sovereigns, the AAArisktocracy and mortgages, than with assets considered risky, like loans to SMEs and entrepreneurs.

So ask the candidates:

Does that mean “the safe” have even more and easier access to bank credit than usual and “the risky” have even less and on more expensive terms access to bank credit than usual?

If the answer is no, disqualify the candidate.

If the answer is yes, then ask: 

Do you think that might dangerously distort the allocation of bank credit to the real economy?

If the answer is no, disqualify the candidate.

If the answer is yes, then ask: 

In terms of what can pose the greatest risk to the bank system, would you agree with Basel II’s risk weights of 20% for what is rated AAA to AA and 150% for what is rated below BB-?

If the answer is yes, disqualify the candidate.

If the answer is no, then ask: 

Do you agree with a 0% risk weighting of sovereigns?

If the answer is yes, the candidate should be classified as an incurable statist and accordingly dismissed.

If the answer is no, you can then proceed with the rest of the tests.

Good luck!

PS. How many of those currently in the Board of Governors of the Federal Reserve System, would pass this test?