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Per Kurowski
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And there is even no discussion about the fact that the risk weights in the risk weighted bank capital requirements are to access to credit, what tariffs are to trade, only more pernicious. http://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html
Toggle Commented Aug 2, 2019 on The missing backlash at Stumbling and Mumbling
“To show their appreciation, at the end of his long teaching career, his students gave him an apple and a banana”… and they duly hoarded the mangoes… since they do not come from a country where mangoes are too abundant, like Venezuela, with its runaway inflation https://perkurowski.blogspot.com/1999/03/of-mangoes-and-bananas.html
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If when setting their risk weighted capital requirements for banks, the regulator’s economists used the ex ante perceived risk of bank assets as proxies for the ex post risks to banks. How should we classify that? http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html
A logical result of having statist bank regulators who favor sovereigns’ access to credit over that of citizens http://unsustainabledebtsustainability.blogspot.com/2004/11/bank-regulators-are-favoring-too-much.html
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Risk aversion: Look into that sad historical moment of Basel Accord 1988, when regulators decided we should not risk climbing up the mountain more. http://subprimeregulations.blogspot.com/2015/06/the-basel-accord-was-important-turning.html
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One benefit of helicopter droppings is that it keeps away the redistribution profiteers, a bit like what Finland and now Canada are trying to do with a universal basic income. But please, don’t qualify anyone like Adair Turner who was unable to understand how risk weighted capital requirements for bank distorted the allocation of credit to the real economy, as ”smart”.
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To put a damper on the "hyper-meritocratic society" you could limit the tax deductibility as an expense of any salary to, for example, fifty times the median salary of the nation. http://teawithft.blogspot.com/2014/05/taxing-property-or-inheritance-could.html
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Yes but I believe we are talking about two different regulatory responsibilities, the more you mix them up, the less accountability there will be.
Toggle Commented May 10, 2012 on Krugman: How Bad Things Are at Economist's View
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Which is precisely what I said. Had the European banks not been allowed to hold these securities against a meager 1.6 percent of equity they would never have shown this appetite... but, since they were, their appetite was insaciable
Toggle Commented May 10, 2012 on Krugman: How Bad Things Are at Economist's View
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I wrote “had” they done that in Basel II, and ,unfortunately in Basel III, they are still leaving open the barn doors, just in case there is a horse still in there.
Toggle Commented May 9, 2012 on Krugman: How Bad Things Are at Economist's View
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Europe…what if? What if European bank regulators had imposed their 8 percent capital requirement for banks on all their assets, like they did for instance on loans to small businesses and entrepreneurs, instead of allowing the banks to hold some assets against a meager 1.6 percent or less? For a starter, European banks would not have invested in triple-A rated securities backed by lousily awarded mortgages to the subprime sector in the USA; would not have lent the outrageous amounts they did to Icelandic banks or Greece; and Spanish banks would not have overexposed themselves to the real-estate sector. Do you want me to continue? http://bit.ly/dFRiMs
Toggle Commented May 9, 2012 on Krugman: How Bad Things Are at Economist's View
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To me a bank crisis really occurs when banks put more bad assets on their books than they can digest, but to others it is when the bankers discovet that, but to others when the market discovers that, and to politicians when they cant’t do anything about it or hide it.
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Julio... “I think you let the rating agencies off to easy.” Yes and no. In January 2003 I ended a letter to the editor published in the Financial Times with “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”… and who gave them that destructive power… the regulators. Also reflect on the following… the better the credit rating agencies are, the more we will trust them, and so the bigger can the fall be.
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Sorry one part of the reply is further below... of course the usual suspects played a part, an important one, but they did not cause this crisis.
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Julio... yes one single percentage. The banks already discriminate and clear for perceived risk with interest rates, amounts and other terms, so ordering them also to consider it for the capital requirements made them overdose on perceived risks. http://www.cityam.com/forum/holy-moly-banks-were-drugged-basel-s-rulebook
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The crisis was global, just Europe invested more than a trillion dollars in triple-A rated securities backed by lousily awarded mortgages to the subprime sector … and then they all went to Iceland banks and then to Greece and so on… always in pursuit of low capital requirements, which allowed for high leverages, which allowed for high expected returns on equity… and so, citing any particular firm or incident, is of purely anecdotic interest. By the way this incident is in 2007, and already in October 2004 in a formal statement I delivered as an Executive Director of the World Bank I warned: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions”… and let me assure that if I knew that many more had to know it… but the regulators were so convinced they had found the magic potion to stop all bank crises forever. I tell you, if there ever was any real arrogance involved that was that of the regulators thinking themselves being the risk-managers of the world.
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As I recently posted on the IMF blog The credit ratings are like traffic lights… indicating green, yellow and red, and the banks and the markets observe them and take their precautions. But then came the bank regulators and with their capital requirements ordered the banks to drive much much faster when the light was green, and so, when there suddenly was a technical failure, as should have been expected with human fallible credit rating agencies, and the green light should have been red… we then had the mother of all crashes.
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And similar believers in the absolutely safety concept and no counterparty risk were all those buyers of AIG products which, that since AIG was rated AAA, allowed the banks to book what they hedged with AIG against minimum equity…. “A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said”
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And unfortunately, if you look at the data using the wrong hypothesis, you will never get to the truth. I do not know if they accept a link here but the paper, or better said, the amateurish draft of a paper, on this is here: http://www.subprimeregulations.blogspot.com/2012/05/paper-most-current-version.html
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When you lend too much to those perceived as risky that is a sign of “excessive risk-taking”, but when instead you lend too much to what is perceived as absolutely not-risky that is a sign of “excessive risk-adverseness”. Capisce?
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Yes and I bet what got Citigroup into trouble was excessive exposures to what was officially ex-ante considered to be not-risky. Are you willing to bet on that what got Citigroup into trouble were excessive exposures to what was considered by regulators as risky?
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Precisely… small businesses and entrepreneurs were officially determined as risky and banks were required to have 8 percent in capital when lending to them and AAA-rated clients, Icelandic banks and sovereigns like Greece were officially determined to be absolutely safe and banks needed only 1.6 percent in capital when lending to these. That meant that banks could only leverage their equity 12 to 1 when lending to the “risky” but over 60 to 1 when lending to the “not-risky”. And by the way, have you ever heard of a bank crisis that resulted from excessive lending to what was perceived as risky?
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The real hurtful austerity that has been hitting the Western World during the last decade is the austerity in risk-taking, imposed on our banks by overly wimpy regulators, by means of their capital requirements based on perceived risks. Since Mr. Stiglitz is not capable or willing to understand that, his over-generosity would only translate in dangerously overpopulating whatever havens are officially still perceived as safe, and waste away the last reserves of available fiscal space we have. Someone who looks at a balance sheet and finds it to be obese in exposures to assets that were officially perceived as absolutely not risky and anorexic in term of exposures to what was officially perceived as risky… and still call that “excessive risk-taking” is a blind Monday- morning-quarterback who refuses to consider the pregame.
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And they should have listened much more to Pope John Paul II when he said “Do not be afraid. Do not be satisfied with mediocrity. Put out into the deep and let down your nets for a catch.” Instead they did not say a word when the bank regulators instilled the system with senseless risk adverseness, with their outright stupid capital requirements based on “officially perceived risk” And of course ,if you determine the capital requirements for banks based on “risk-avoidance”, and with that favor the financing of houses, public debt and whatever has managed to temporarily hustle up a good credit rating, and discriminate against all of what is officially perceived as “risky”, as the Basel Committee and other assorted regulators have done, you will, naturally, end up with a lot of houses, dangerously excessive lending to what is triple-A rated, huge public debt, but very few jobs which, to create, requires a lot of fishing in deep and risky waters. It is sad bunch of finance experts, economists, regulators, diverse PhDs and journalist who do not understand this, not even after the crisis set in.
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Of course Fannie and Freddie Didn't Do It: The Basel Committee did it. All financial and bank crisis originate from excessive investments in what ex-ante is considered as being low risk; never ever has a financial or bank crisis originated from what is perceived as risky. When therefore the global bank regulator, the Basel Committee, created special incentives for banks to lend or invest in what ex-ante is perceived as not risky, and deterred them, more than they usually are, to lend or invest in what ex-ante is considered risky… they doomed the system to a mega-disaster. In the video there is a brief and simple lesson on how bank regulators have become so fixated on seeing the gorilla in the room that they completely lost track of the ball. http://bit.ly/c66DLp As you see the financial and bank crisis is easy to explain. The problem though is that the explanation is too embarrassing for the regulators and who therefore have a vested interest in it not being known and in creating the myth that no one saw it coming. By the way, consider that in April 2004 SEC approved the use of Basel criteria for the capital of investment banks and that in June 2004 Basel II was approved by the G10, and then have a fresh look at the first chart in the post above. Per Kurowski A former Executive Director at the World Bank (2002-2004) http://subprimeregulations.blogspot.com/
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