Wake up Mr. Wolf!

Sir Martin Wolf holds that “The rescue of Bear Stearns marks liberalisation’s limit” March 26; as if we have had some true liberalisation. 

He is wrong. Much the contrary, never before have the financial markets been so regulated as they are now with the credit rating agencies, empowered by the regulators, deciding over how much each bank needs to pack their rucksack with reserves; and most of what has happened since imposing the minimum capital requirements imposed on the banks through Basel I, has been the result of regulatory arbitrage. 

Wolf quotes Ben Bernanke in a speech that “makes one’s hair stand on end” saying that much of the subprime mortgage lending of recent years was “neither responsible nor prudent”. 

Mr Wolf. You know what makes my hair stand on end? That all the market did was to follow the criteria of the credit rating agencies that felt that such mortgages were good enough to make up prime collateral. Wake up Mr. Wolf, before we can start to think about the limits of liberalisation we still have much to think about the limits of regulations.

PS. Credit ratings as a systemic risk