I am still not sure what concrete recommendations you are putting forward.

First …Do no harm! And which in my mind is foremost “do not mess around with arbitrary risk-weights!”

But perhaps the following letter that I wrote to the Financial Times in August 2004 explains it better

“Towards a counter cyclical Basel?

Sir, the financial system is there to safeguard savings, to generate economic growth by channeling investments, and to promote equality by providing full and free access to capital and opportunities.

Currently, our bank regulators headquartered in Basel are primarily concerned with the first goal, that of avoiding bank collapses, and how could it be otherwise, if you have only firemen on the board that regulates building permits.

Now, one of these days, the financial system, neatly combed and dressed in a tuxedo, but lying more than seven feet under in the coffin of financial de-intermediation, is going to wake up to the fact that it needs the presence of others in Basel. At that moment, perhaps we might start hearing about flexible capital requirements, moving up to 8.2 % or down to 7.8% by region, in response to countercyclical needs.

Meanwhile it’s a shame that even their first goal might turn out to be elusive, since although the individual risks have fallen with Basel regulations, the stakes have increased, as those same regulations accelerate the tendency towards fewer and fewer banks.”

And then you say that “for example, maybe a loan for a water-treatment facility in Peru should have a lower interest rate than a Goldman Sacks loan for currency speculation. How this would be accomplished though is beyond me. Certainly leaving it up to the market is not going to do the trick.”

Well I have for years argued that if we absolutely have to keep the current Basel methodology we should at least demand that the minimum capital requirement for the banks be calculated using a matrix with, on one axis some better defined risk of default weights and, on the other axis, “societal purpose” weights. Why should bank finance “riskless” but useless or even dangerous projects for the society and not worthier projects even though they carry more risk?

I have never argued against capital requirements for our banks and for instance 8 percent sounds like a good place to start and this would allow for a 12.5 to 1 leverage. What I am against though is the regulators arbitrarily setting different capital requirements for different risks, for many reasons. Here are just a couple:

It gives extraordinary powers to the official risk surveyors the credit rating agencies and who because they are humanly fallible or because they will be captured by interested parties will sooner or later lead too much capital over a precipice or into a swamp.

There is nothing that says that just because something has a low risk that it should be favored more than it already is by the market by means of arbitrary regulatory concoctions.

The market is used to allocate risks through spreads in the interest rates and here, under the table someone plays around with risk-weights and confuses the market which does not any longer know how much of a lower risk spread is the result of a lower risk and how much is the result of a lower risk-weight.

Given that what is perceived as having low risk could lead to more carelessness than what is perceived as having higher risks… is there not a regulatory argument that points in the opposite direction? …the less the perceived risks are the higher the capital requirements?

And the list goes on but since you describe yourself as a teacher of social studies let me end with the following one:

The current minimum capital requirements for banks based on risk assessments, by favouring the low risk that normally resides more in rich and developed countries and castigating the higher risk that is more prone to be perceived as being part of the poor and the developing world increases the world’s Gini coefficient.

As I understand Per Kurowski’s arguments, the whole high capital requirements for risky investments/low capital requirements for “safe” investments, framework established at Basel (and possibly before?) is misguided, and even dangerous. The bad apples of the current financial disaster were not your fly by the seat of your pants daredevils, but actually quite risk averse. Counter-intuitive as this assertion may seem, it is supported by the fact that the overwhelming majority of losses have come from AAA rated investments. Risk is inherent in any human activity and is actually a good thing (or at the very least necessary). The desire of the current crop of masters of the universe to create riskless investments and make what is essentially free money, lead to the recent bubble in housing. As has been pointed out by many others, this bubble took place in an already developed nation and had practically no useful social benefits, as building a railroad in Argentina for example might have. Therefore, the already existing financial regulations amount to little more than a subsidy for rich nations and a tax on poorer ones. Why would we want to continue, let alone strengthen, the current system?

Sorry for the lengthy summary, but I want to make sure I’m reading the arguments correctly. I’m not an expert on economics or finance (actually, I’m a social studies teacher so I do sometimes teach intro 12th grade economics, but I’m well aware of my own ignorance), so it’s quite possible I’ve misread some of the arguments. It seems to me that one of main reasons why the argument that financial institutions need to maintain higher levels of capital reserves has so much traction is because it is very easy to understand. Even a non-expert such as myself can intuitively grasp “skin in the game.” Per Kurowski puts forward a pretty compelling argument that this is a misguided worldview, but I come away from reading his comments without any clear idea of what his recommendations are. If a 1.6% equity ratio for AAA rated investments is too low, what would be an appropriate number? Who decides that number if we are not going to rely on private rating agencies or the government? If risk differentials are already priced into interest rate spreads as Per Kurowski claims should we get rid of government mandated capital requirements altogether and just let the market decide? This seems to me to be a little too close to the efficient market hypothesis way of thinking that got us into this mess in the first place. Dr. Johnson’s recommendations can be summed up in three words, “triple capital requirements.” Again, this is very easy to understand, even if it may be somewhat extreme. Per Kurowski makes a convincing argument that this is a misguided approach, but I am not at all sure what he means when he says wants to “mend the faulty core of our bank regulations.” Without a clearer explanation of what mending the core of our bank regulations entail, I find myself gravitating toward Dr. Johnson’s simpler approach.

The US has always been a nation of the oligarchs, by the oligarchs, for the oligarchs- for better and worse.

Now, as expected, the Supreme Court (slim majority) as a matter of its (oligarchist) “false consciousness” inclination, will rule for Corporate/Labor Union unrestricted fundings of political campaigns, ostensibly to uphold the right of free speech (as much as I wonder if they would uphold Hitler’s right, then)

The issue at hand, though, for The Supreme Court to consider, simply, is this- POWER DIFFERENTIAL.

If the COURT does not rule accordingly OLIGARCHS win-FOREVER. One can, then, hope for benign oligarchs. Good Luck.

…proving that it’s literally impossible for some people to be betrayed.