March 31, 2009

And then there is also the “too bad to regulate”.

Sir Peter Thal Larsen writing about financial regulations in “A lot to be straightened out” March 31 comments on the option to submit the “too large to fail” to have to pay a hefty fee for the support they enjoy.

As an Executive Director of the World Bank (2002-2004) at a Risk Management Workshop for Regulators held at the World Bank in May 2003 as I said the following.

“Some old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, seem much wiser than today’s no burning at all that only allows for the build-up of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.Knowing that “the larger they are the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size.”

Sincerely do we really need regulators that have to wait for a catastrophe before coming to reason? Looking at the regulators utterly silly behaviour over the last decade or so it becomes clear that we also have a problem with regulators that are too bad to regulate.