kollerro

How the state ruins balance sheets!

A new study that reviewed the performance of some 30 banks in Germany and divided them into publicly owned and privately held banks found that state-run banks had 2-3 times higher losses than private banks. The authors of the study think that this is due to the poor composition of supervisory boards where they found a tremendous lack of competence (in publicly owned banks).

"For this purpose, we examine the biographical background of 593 supervisory board members in the 29 largest banks and find a pronounced difference in the finance and management experience of board representatives across private and state-owned banks. Measures of “boardroom competence” are then related directly to the magnitude of bank losses in the recent financial crisis. Our data confirms that supervisory board (in-) competence in finance is related to losses in the financial crisis. Improved bank governance is therefore a suitable policy objective to reduce bank fragility."

Another good example why public management should be the least favoured option for anyone. Unfortunately, no one has calculated the costs that these publicly owned banks have meant to tax payer's money so far (including bail-outs). It would be interesting to oppose this costs to the cost of having them let gone bankrupt.

A similar study from the University of Ohio came to similar results.

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Chosen by the gods

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Someone told me yesterday that the Tobin tax would be a good thing in order to remove “stickiness” and “chaotic behaviour” out of the financial markets.

I don't see a Tobin tax as a good thing. Chaotic behaviour, as he called it, is good as it means evolution and opportunities. If you control everything (and that is meant in two ways: (a) the "stickiness referred to above and (b) transactions will be traceable in every detail), you will not have opportunities but only bureaucrats deciding what is best - I think in history we have plenty of examples that went wrong when bureaucrats were at the orders. Failing, and bubbles, crisis etc. are part of that, is good as it cleans up misalignments. You wouldn’t put a tax on sending emails just because it's chaotic and could for example influence markets.

The aim should be to go in the opposite direction and make other areas as fluid as financial transaction, e.g. world trade. Liberalising markets only stop to make sense when the world has become a huge internal market - until then markets should get even more interconnected and freer. Imbalances would build less often and would be more controllable - how often have you heard that within a country one (geographic) area has caused a country wide crisis because of imbalances?

I think after going for bankers’ boni, low tax jurisdictions and rescuing unviable banks with tax payers' money, this is just the next step hiding up errors committed until now and as in the case of low tax countries, the world will be bullied into a new adventure. In the end who will have initiative? The bankers who cannot make a fortune anymore? The traders that have to pay tax for what they do (on top of income, corporate and wealth taxes)? If governments had spent money wisely before, we wouldn't need to search for other sources of income. I would be really curious how many billions a year are spent only in subsidies for coal mines as opposed to "green" energy.

Where will be the end? How much more taxes do we have to pay to make up for failed enterprises and projects which are kept artificially alive? Are jobs really the reason or could we create more jobs, by using this money otherwise, i.e. by using it ourselves? Who decides who may fail and who not? If anyone finds a clear and objective rule in bail-outs and failures that happened in the past 24 months, I would be very surprised. In the end it is a new power game – someone has to control and decide. Since we are civilized people now, the power hungry do not gain power by making warfare or by having police states (save for certain exceptions). They decide who is allowed to live or die (economically). So we have a whole new kind of power structure, which has to be exported everywhere in order to work. The positive aspect is that bail outs make wars superfluous. We just decide whether we let Iceland down or not. But in the end – and I am no friend of conspiracy theories – this does not lead us anywhere else than being subject to even fewer people deciding our (economic) fates. Very often we have not even voted for them (Trichet, Bernanke, Barroso, etc.).

What we need right now is not more regulation, more taxes and more bail-outs, we need the opposite and clear and objective rules to play by. Elites could set these rules but under public control. I always use to say that laws 200 years ago were drafted by single persons and of much higher quality than nowadays – just look at the civil codes that came up around 1804 to 1811. They are generally the least amended laws of countries in contrast to, let’s say, any tax law. However, they were subject to public control (admittedly, some with a certain time lag). We only need rules on fair play and that if someone fails he has to leave the game and start over. This needs someone who enforces the fair play, but that is all. We don’t need gods to tell us how to move our chess figures in the play or overriding the rules of the game in order to save your king or queen or even some peasants.

It is a new road to serfdom that is starting to show and it is now urgent to stop this trend.

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A new central planning era

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In the end it's all about risk taking not avoiding - if you want to make a profit you have to take risks. If you hedge against all of it is a cero sum game, just think of playing always the same amount on red and black on a roulette table. Banks should be able to go bust as any other business, because the next time it's not the banks but the countries that go bust with them ; cfr. Iceland.

Risk taking is also luck. A "real" producing company has to take risks when deciding which products to sell/develop/market etc. If it goes wrong their risk assessment was wrong and the company goes bust and no one cares. Why should we care in the case of banks? Because of the savers who deposited their money there? I don't think so because then we should also care about the pension plan savers who invested in the shares of such banks, but nobody does.

I am really getting tired of hearing about VaR, Sharpe, stress tests and regulators taking business decisions. We are on the way to serfdom and we are creating a central planning monster of new creation. Guys, the USSR has not gone for such a long time- what happened to the collective memory?

Let people take risks again, if it goes wrong it goes wrong. Full stop. Let risk assessment and luck/chance/chaos decide who lives and who dies. We do not need a central authority to decide who is worthwhile living and who is better dead. What we are trying to do now is to force the models we have developed and that have been proved wrong to function. Now we will have a regulator who will act as a rational investor, i.e. what the crowd did not manage to produce we will now put in the hands of very few. Who guarantees that those people have the right criteria and are always rationale, do not act politically or will not manipulate markets? What about corruption?

We are now paying trillions of any currency for what? So that some banks survive because otherwise the “system” would break down. Who defines the system and why is it important to us. Systems evolve, are alive and develop. Why would we want to keep a certain status quo? Let the world its evolution. It is well known in genetics that reducing the diversity and controlling the system will lead to more problems. Our trillions didn’t even help to let people who got into mortgages that they couldn’t pay in their houses. They had to go, but the trillions are still lost. Wouldn’t it have been better to pay in 2005 or so 500 million for social housing programs giving away flats for free so that those people had a roof above their heads? Bubbles wouldn’t have grown as much as they did and perhaps we wouldn’t have had a financial crisis? I would say that this would have solved only part of the problem. As long as there is a bunch of people saying how the economy has to go, how much surplus you create, how interest rates are fixed and decide what is the adequate price of money, how much one currency costs for exchange of another and who is too big to fail, we will not prevent future crisis.

If we let the economy, the financial system, etc. evolve as it was a living organism without too much intervention from the outside it will evolve to a better state in order to survive and to be better adapted as in biological evolution. If we mess around we will only provoke greater tail events, more black swans. Just think about all the experiments mankind did and where in order to solve one problem it created an even bigger one (to stay in Australia, think about cane toads in Australia). In order to avoid further cane toad syndromes, we should retreat not advance. We should focus on who really needs protection and just protect those helpless and not everyone. The often cited grandmother being sold Lehman structured notes is not worth protecting at the cost of suffocating any possibility of evolution in the system. If there are leaner ways to protect her then do it otherwise leave it. You don’t hand out machine guns to any granny just in case she is robbed, not even if she lives in a dangerous area or often frequents such areas. You might increase police presence in such areas but you will not create a 1984 state.
Let common sense take over again. The current hysteria is nothing else then the other side of the coin. First we had the irrational investor now we have the irrational regulator/legislator. And this makes it only worse. The next 1 in 100,000,000,000 years event is just around the corner and nobody will be able to explain how two such events could have occurred in such a short time if it is statistically impossible.

The more freedom we give the “system” the more we will benefit. It will grow stable and create new niches and from such niches new ones will evolve – just like zooming into a fractal. There will be crisis and big ones, but they will not be caused by us, but by bad luck and until the end of time no one will be able to control chance. Even if you trough a coin a million times, the distribution of its outcomes will not be normal, although close. It just depends on your scale for the graph.