“If they’re good enough for the Basel Committee they should be good enough for you."
Sir John Kay in “Kudos for the contrarian” December 30, writes well about the difficulties of predicting a crisis but leaves out perhaps the difficulties many institutions like the IMF face when they also have to avoid the risk of turning some of their predictions into self-fulfilled prophecies.
Much more important though than predicting the crisis is alerting to the existence of conditions that could create a crisis, but this is no easy task either. I had no idea from where the current crisis was going to come but I was absolutely certain a huge crisis would appear, sooner or later.
When the Basel Committee as our supra-national bank regulator decided to establish a direct linkage between the opinions of the credit rating agencies and the minimum capital requirements of the banks, they sent out a loud and clear message of “If they’re good enough for us they should be good enough for you”. This excessive empowerment of some very few agencies was doomed to create a mega crisis. The explosion, this time, came when the market was led by some shining triple-A rates over the precipice of the badly awarded mortgages to the subprime sector in the USA.
I warned about it all (even as an Executive Director at the World Bank 2002-2004) but to no avail. Either the credit rating agencies were so important that few wanted to step on their toes; or their sole existence was so comforting that no one wanted to abandon their Nirvana of having someone to believe in. And therein lies the prime difficulties of all contrarians namely that they most often are contrary to the normal human wish and need of having something to believe in.
Much more important though than predicting the crisis is alerting to the existence of conditions that could create a crisis, but this is no easy task either. I had no idea from where the current crisis was going to come but I was absolutely certain a huge crisis would appear, sooner or later.
When the Basel Committee as our supra-national bank regulator decided to establish a direct linkage between the opinions of the credit rating agencies and the minimum capital requirements of the banks, they sent out a loud and clear message of “If they’re good enough for us they should be good enough for you”. This excessive empowerment of some very few agencies was doomed to create a mega crisis. The explosion, this time, came when the market was led by some shining triple-A rates over the precipice of the badly awarded mortgages to the subprime sector in the USA.
I warned about it all (even as an Executive Director at the World Bank 2002-2004) but to no avail. Either the credit rating agencies were so important that few wanted to step on their toes; or their sole existence was so comforting that no one wanted to abandon their Nirvana of having someone to believe in. And therein lies the prime difficulties of all contrarians namely that they most often are contrary to the normal human wish and need of having something to believe in.
Posts
